As of July 31, 2019
The First Cut Is (Not) the Deepest
As expected, the Fed cut interest rates for the first time since 2008 to “insure against downside risks” and ended the balance sheet runoff two months early. The 25 basis point cut was less than some pundits had hoped and was widely viewed as hawkish following Powell’s suggestion that this was a “midcycle adjustment” rather than the start of an easing cycle. However, history has shown that “insurance cuts” are often the first in a series to follow. President Trump’s subsequent ratcheting up of the trade war by extending tariffs to nearly all Chinese imports could likely necessitate the need for further easing. With U.S. 10-year treasury yields falling to the lowest level since 2016 on the news, the next cut may be right around the corner.
Brexit—Will Europe Bend to Boris’s Hard Line?
On 23 July, Boris Johnson sealed the Conservative Party leadership contest and was named UK Prime Minister. Since then, Johnson has been galvanizing Brexit support and increasing pressure on negotiators with his commitment to renegotiating May’s Withdrawal Agreement, deleting the Irish backstop, and assuring exit will occur on October 31st, with or without a deal. With both sides entrenched and just three the months to go, the odds of a no-deal Brexit are perilously high. The uncertainty has sent the pound to a two-year low with further downside likely should a no-deal exit occur. Johnson’s slim majority leaves him vulnerable to a no-confidence vote but, even if a general election was called, it is not clear that any single party would gain enough support to stop what is looking more like the inevitable.
Earnings—U.S. Consumer to the Rescue (For Now)
As the 2nd quarter U.S. earnings season winds down, earnings beats have lifted results modestly into positive territory for the quarter, allaying fears of a possible earnings recession. However, slower global growth, a strong dollar, and trade disruption are taking a toll on multi-national companies, especially those with more that 50% revenue exposure outside the U.S., which have posted double-digit earnings declines this quarter. In contrast, domestically-oriented businesses are reporting mid-single digit growth supported by a resilient U.S. consumer. With the ratcheting up of tariffs on goods such as toys, apparel, and smartphones, U.S. consumer spending could retrench, and domestic-oriented companies may start feeling the pain too.
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