As the Fed’s two-day meeting gets ready to start on Tuesday, another big central bank appears to be falling in line with the view that the world needs those institutions to keep supporting economies and markets.
ECB President Mario Draghi has lit a small fire under stock futures and the dollar, saying the bank could come to the aid of an ailing EU economy. President Trump is not happy.
Next up, Fed Chairman Jerome Powell, who faces a mixed bag of U.S. economic data, but plenty of pressure to cut interest rates on concerns that a lengthy trade battle could dent the U.S. and global economy. Markets are looking for a hint of an interest rate cut to come this year.
Our call of the day from Brian Levitt, senior director of investment strategy at Invesco, doesn’t see the Fed letting anyone down. He says the central bank, with its mandate of full employment and price stability, has backed off monetary policy in the past that has been perceived as too tight, upsetting markets.
He told MarketWatch in an interview that investors worry too much about the U.S. economic cycle or expansion lasting too long, with its eventual end harming equities. “We continue to believe this cycle is going to last far longer than most people think,” because the Fed will keep doing its job, he says.
But Levitt warns that they do need to watch a couple of factors that could weigh on stocks: tightening financial conditions and persistent dollar strength.
“Financial conditions reflect a combination of the credit spreads, the shape of the yield curve, and currency strength or weakness. In this cycle, when the Fed has raised rates (2015 and 2018) we have seen the dollar strengthen, long rates fall, and credit spreads widen. Coincidentally, the economy and earnings growth slowed,” said Levitt.
And then stocks pulled back, such as in 2015, when they saw a short-lived rally after a rate hike, while the meltdown after the December 2018 rate increase is still raw.
Levitt says forget defensive stocks that act as insurance against a slowdown, as he favors the more cyclical companies — they sell items that consumers buy when an economy is booming — like technology and materials sectors.
Imagine U.S.-China trade tensions reach a point where the latter starts dumping its huge pile of Treasury bonds. The move sparks higher interest rates, damaging the U.S. economy, not to mention negatively affected U.S. bonds, of which plenty other countries hold. It’s a view so grim that experts call it the “nuclear option.”
Fresh U.S. Treasury data shows China’s U.S. Treasury holdings fell to $1.113 trillion in April from $1.120 trillion the previous month, to a nearly two-year low. The numbers predate the fresh uptick in trade tensions for May, and China is still the largest non-U.S. holder of that paper. Here’s our chart of the day from Reuters.
On the eve of his re-election announcement, President Trump vows the U.S. will “start removing the millions of illegal aliens.”
Apart from the Fed meeting (preview here) we’ll get data on construction of new homes that started in May.
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