Fed up with this saga

Fed Speak 

The Fed’s latest meeting minutes were released this week and largely confirmed what we had assumed to be the situation – the FOMC members seemed to be on board with continued patience on future adjustments to interest rates. In terms of the direction of interest rates in the future, however, members seemed to be a little more divided. A few officials demonstrated support of higher rates pending continued economic expansion while others expressed concerns about the risk of low inflation. On this front, the committee will be meeting in Chicago in early June to discuss whether the 2% inflation target is appropriate but adjustments to policies aren’t expected until early 2020. 

Moral of the story: The market is expecting a rate cut by the beginning of 2020, but it doesn’t seem like the Fed is really on the same page – even the FOMC members expressing concerns about low inflation didn’t actually explicitly call for an interest rate cut. The Fed still seems to be standing firm on its assessment that the weakness in inflation and other economic indicators in the early part of this year is transitory so I’m not expecting any contradicting policy moves until we see a few more quarters of data to make a case for policy rate changes one way or another. 

MAN(ufacturing) DOWN! 

Durable goods (products that are intended to last at least three years) orders dropped sharply in April by 2.1% driven by a few different factors – falling demand for Boeing jets (are you up to date with all this drama?) and new cars/trucks and, more importantly, weakening business investment because of escalating trade tensions with China and worries around a slowing US economy. In addition to weak numbers in April, the numbers for March were revised downward from 2.6% to 1.7%. Adding to this, the IHS Markit “flash” survey for US manufacturers fell to a 9.5 year low of 50.6 this month (any number over 50 is indicative of growth).

Moral of the story: Manufacturing has been showing weakness since the fall of last year and escalating trade tensions are not helping assuage companies as they continue to take their foot off the accelerator to try and avoid the crash-and-burn scenario that could occur until we can learn to be friends with China and the global economy shows signs of strength. 

My way or the Huawei 

Trump’s ban on Huawei Technologies Inc., a Chinese technology group, dominated news headlines and moved markets this week. In response to this ban, Google revoked Huawei’s Android license, which effectively restricts Huawei’s access any Android system updates (including security updates), YouTube, Gmail, and the Google Play store. Additionally, other companies like Intel, Qualcomm, and Broadcom will not supply Huawei until further notice. The Commerce Department then temporarily eased some of the restrictions and announced it would allow Huawei to buy American goods to maintain existing networks and phones until August 19. 

Moral of the story: This is just the latest chapter of the tit-for-tat trade saga unfolding between China and the US. The two economies are deeply intertwined and negotiations toward a trade deal seem to be demonstrating a classic case of “one step forward and two steps back” – every time we seem to think we’re close to a deal, the two parties end up at an impasse and the market’s patience levels are starting to get v low.