What in the world??

Around the world 

While the markets were awaiting a decision from the Fed, European Central Bank President Mario Draghi communicated the ECB’s willingness to further its quantitative easing by cutting rates and buying bonds if needed to support the Eurozone economy. Trump responded to this by effectively threatening the Fed to act similarly to buoy the US economy. The Fed is an independent organization and is as likely to respond to these threats as the Kardashians are to giving up social media. Anyway, we also heard positive updates on the China trade front from the G-20 Summit, reviving hopes for some resolution here in the near future. There was also a US drone shot down by an Iranian missile in international airspace this week, after which Trump was obviously ready to strike back, seriously heightening tensions in the Middle East as well. 

Moral of the story: The level of global uncertainty that has persisted for an extended period of time, coupled with the fact that we’re at such a late part of the economic cycle, has everyone walking on eggshells. This means business decisions have been cautious or even just put on hold, which slows economic growth. Earnings season will be upon us soon enough and will be telling of how much all of this has actually dampened growth and expectations. 

Philly Fed Survey 

The Philadelphia Fed manufacturing index dropped to 0.3 in June, significantly below economists’ expectations. For this index, a number above 0 is indicative of improving conditions, so we’re getting a little too close to decelerating conditions. Within the index, new orders, shipments, and prices fell fairly dramatically. Interestingly, however, almost half of the firms surveyed expect accelerating production in the third quarter. 

Moral of the story: The New York Fed’s comparable survey also plunged in June and actually landed in negative territory. These reports are generally regarded as a decent indicator of where the ISM Manufacturing Survey will land and we might see a contractionary number this month, which would be a first since the summer of 2016. 

Monetary Policy 

The market was predicting a 30% chance of a rate cut from this week’s Fed meeting but the central bank kept interest rates unchanged. However, the FOMC left some room for a rate cut in the near future by indicating its plan to closely monitor the economy and act if the economy weakens significantly or inflation continues to drop. 

Moral of the story: While the Fed didn’t cut rates this month, about half the FOMC is starting to become more worried about risks posed by the trade war, and the market is fully expecting a rate cut in July. Based on its dot plot, however, the Fed seems to be indicating rising rates again in 2021, which suggests the Fed still believes the current expansion will continue for a few more years. Aka not all hope is lost.