When Doves Cry

It happened, guys

As anticipated, the FOMC cut interest rates for the first time since the financial crisis in 2008. However, the 0.25% cut was categorized by Fed Chairman Jerome Powell as a “mid-cycle adjustment” as opposed to the start of a larger quantitative easing campaign. While markets were initially excited for this rate cut, this signaling from Powell was not what the doves were anticipating and sent stocks tumbling. 

Moral of the story: At the end of the day, the Fed will monitor the economy and act as needed to maintain a strong labor market and inflation near 2% (which continued to fall in June). The biggest wildcard is Trump’s trade war with China (ICYMI, he threatened to put tariffs on all remaining Chinese imports starting Sept 1). Trade tensions continue to prevent business investment in the midst of uncertainty (evidenced by June’s ISM Manufacturing Report) and it seems silly for the Fed to react more dramatically until this is resolved. 

Speaking of the labor market… 

The US added 164k new jobs in July, keeping the unemployment rate at 3.7% and reiterating the strength of the labor market. However, wage growth remains muted at 3.2%, which is below the ~4% increase we’ve historically seen with unemployment at such low levels. Published after the FOMC’s decision, this report provides support for the view presented by Powell.

Moral of the story: The economy may have 99 problems (it doesn’t really), but the labor market definitely aint one. We have created, on average, 165k new jobs each month this year and we technically only need about 80k every month to continue keeping unemployment at these levels. We’re doing just fine. 

Earnings (part 3)

As if a rate cut, Trump’s continued threats, a new budget deal, another Democratic presidential debate, and the avalanche of crucial economic reports (personal income, consumer spending, manufacturing, employment, consumer sentiment, consumer confidence, trade deficit) weren’t enough to digest, the market was also being inundated with earnings releases this week. SOS drowning.  Apple provided better than expected guidance for revenues and margins going into the next quarter driven by improvements in iPhone sales, wearables, and the China business. All indicators of a strong consumer and the improvement in China is especially encouraging given the current macro situation. We heard from a fair amount of other consumer companies (Newell Brands, Etsy, Restaurant Brands, Toyota) and enterprise companies (NetApp, Arista Networks) with mixed results and outlooks about the remainder of this year. 

Moral of the story: At this point, about 80% of S&P 500 companies have reported earnings and 72% of them have reported results ahead of expectations. However, a common theme remains – uncertainty about global trade relationships continues to be a dark cloud that the strong consumer is slightly managing to keep at bay.