Equity markets were little changed despite a wave of potentially market-moving news on the Fed, geopolitics, and trade. September is historically a volatile month as traders return from summer vacation, though the past 11 trading days have only seen one directional move of more than 0.5% for the S&P 500 Index. While the S&P 500 is having trouble breaking out to record highs, the breadth (i.e. participation) is at the best level in 12 months, suggesting the market is healthy below the surface.
As expected, the FOMC voted to cut the Fed funds rate by another 0.25% on Wednesday, though forward guidance was noncommittal regarding future rate cuts. The Fed funds target rate now stands in a range of 1.75-2.00%, which is slightly below the inflation target of 2%, bringing real (inflation-adjusted) interest rates to negative. The statement described household spending as rising at a strong pace, while business fixed investment and exports have weakened. The “dot plot” shows reasonable disagreement on the broader committee (voters and nonvoters), with five members arguing that rates should have remained unchanged, five suggesting this cut is enough, and seven looking for an additional cut this year. The Fed futures curve shows a 43% chance of a cut in October (up from 34% last week) and 63% by year-end (up from 53% last week). The dollar index has returned to near an 18-month high.
Deputy-level meetings between the U.S. and China are ongoing, though no detailed progress has been made and President Trump expressed skepticism of a partial deal. Observers worried that the cancellation of a Chinese trade delegation’s trip to American farm sites was a signal of a breakdown in talks, though Chinese officials said it had “nothing to do” with talks, which they describe as “productive” and “constructive.” The odds of a NAFTA replacement have improved, as Speaker Pelosi has detailed her support for conversations. The U.S. and Japan negotiators are expressing confidence that a deal between the two countries could occur this month, while Trump hinted that a deal with India is imminent with the visit by Prime Minister Modi next week.
Economic data modestly surprised to the upside last week, led by industrial production rebounding in August to a better-than-expected 0.6% following a 0.4% decline in July. This is counter to manufacturing PMI that suggests a contraction. Housing starts jumped to a 12-year high and existing home sales beat estimates, encouraging reports given a year of lagging home sales and construction. A three-year low in mortgage rates, along with low supply and a strong consumer drove the growth. Leading indicators were a bit disappointing, though they remain positive from a year ago, suggesting a recession is not on the horizon. The Citi Economic Surprise Index jumped to an 18-month high, with a reading of +41 on a scale from -100 to +100, versus -40 in June, as economic data is consistently beating expectations.
The OECD cut forecasts for global growth to the lowest in a decade and warned of further downside, driven by trade conflicts and geopolitical uncertainty. Growth is now projected at 2.9% in 2019 and 3.0% in 2020, down from the original estimate of 4.0%. The report said that the U.S-China trade conflict could reduce global GDP by 0.3-0.4% in 2020 and 0.2-0.3% in 2021. Growth for the U.S. is forecast at 2.4% in 2019 and 2.0% in 2020, slightly better than economists’ estimates.
Elizabeth Warren surged to a lead in the most recent Iowa poll at 22% (from 15%), as Joe Biden faded to 20% and Bernie Sanders fell to 11%. Her support is at 48% among those who identify as “very liberal.” This surge has many on Wall Street nervous, including Leon Cooperman joking, “You won’t open the stock market if Elizabeth Warren is the next president.” The concern is over positions on Medicare for all, Green New Deal, a wealth tax, regulations and the size of government. Online betting markets now show her as the likely nominee for the first time.
What to watch
A busy week of economic data awaits, with PMI data on Monday, consumer confidence on Tuesday, new home sales on Wednesday, revised second-quarter GDP on Thursday, and durable goods, personal income and spending and consumer sentiment on Friday.
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