Geopolitical risks and potential rate cuts continue to weigh on investors. Find out more in this edition of “The Week in Review.”
Last Week Review
Growth and geopolitical uncertainty may be putting downward pressure on rates.We believe global equities began the week on a positive note following news over the prior weekend that the U.S. would not impose tariffs on Mexico. Global equities finished up 0.3% despite mixed economic data and uncertainty due to geopolitical risks weighing on markets after the start of the week.1 Non-U.S. developed markets were the only major region in negative territory, trailing both U.S. and emerging market equities.2 Global interest rates remain near year-to-date lows since the U.S. announced an increase in tariff rates against China.3 Ten year government bond yields are low across key developed markets such as the U.S. (2.1%), UK (0.9%), Japan (-0.1%) and Germany (-0.3%).4
U.S. inflation data disappoints relative to expectations. Headline Consumer Price Index (CPI) data dropped to 1.8% year-over-year (y/y) in May while core levels ticked down to 2.0% y/y. After peaking in July 2018, inflation has generally trended downward and remains below levels targeted by central banks globally.5 Contrary to many investors’ views, Federal Reserve officials have indicated that the low inflation readings are transitory and that they could patiently wait for prices to move closer to the central bank’s 2% target.6 In other U.S. economic data, small business optimism topped consensus expectations and consumer sentiment held close to the prior level.7
Investors continue to digest various geopolitical risks. Financial markets sorted through a number of geopolitical developments globally last week. First, the U.S. threatened to implement sanctions on a natural gas pipeline between Germany and Russia, representing another possible U.S. punitive action involving a traditional U.S. ally. Late last week, two oil tankers were attacked off the coast of Iran, which led to heightened tensions between the U.S. and Iran and a roughly 4% increase in crude oil prices immediately following the incidents.8 Finally, protests in Hong Kong continued over proposed legislation that would allow China to extradite and pursue legal charges against anyone in Hong Kong.
China growth and trade data mixed overall. Investors have been monitoring Chinese economic data closely since the U.S. initially implemented tariffs in 2018. Recent economic data has been mixed with imports, industrial production and fixed asset investment falling below survey expectations. We believe China’s coordination of fiscal and monetary policy to support growth has helped withstand significant trade pressures from the U.S.
This Week Preview
The Fed needs to clarify policy stance as investors look for rate cuts. The June Federal Reserve meeting concludes this Wednesday, where the Fed is expected to clarify its stance on potential rate cuts in the near-term as well as release a new set of dot plot forecasts. Markets only expect a 21% chance of a Fed rate cut in June, but call for between two and three hikes in 2019 overall.9 Though the Fed may use recently escalating trade tensions as cover for its pivot towards more accommodative policy measures, some investors believe the Fed pushed too far with additional rate hikes in late 2018 in an environment of low inflation. Investors may be watching closely to determine the Fed’s views on threats to the growth outlook including trade tensions as well as inflation that remains below the central bank’s 2% target.
Flash PMI data expected to show small rebound. With the exception of the U.S., all the major regions’ manufacturing Purchasing Managers’ Index (PMI) readings were in contractionary territory (below 50) in May. Surveys for the June flash PMI figures set to be released late this week show small upticks across most regions. May services PMI readings were all in expansionary territory and are expected to increase slightly in June. We believe the growth environment remains important to investors as trade tensions have weighed on investor risk appetite. Weak growth readings may continue to push central banks globally to lean towards more accommodative policy stances.
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Unless otherwise noted, all opinions expressed in this post are those of the author and do not necessarily represent the views of Northern Trust. Information contained herein is current as of the date appearing only and is subject to change without notice.
- 1. Bloomberg, MSCI World Index returns 10Jun2019 – 14Jun2019.
- 2. Bloomberg, comparison of MSCI ex-U.S. Equities IMI Index, MSCI U.S. Equities IMI Index and MSCI Emerging Market Equities Index returns 10Jun2019 – 14Jun2019.
- 3. Bloomberg, 10-Year Treasury Rate 02Jan2019 - 14Jun2019.
- 4. Bloomberg, comparison of the 10-Year rates for the Generic U.S. Treasury, Generic U.K. Government, Generic Japan Government, and the Generic German Government Bond Rate, 10-Year Maturity Rates, 14Jun2019.
- 5. Bloomberg, Consumer Price Index (CPI) 01Jul2018 – 14Jun2019.
- 6. Cox, J. CNBC, “Fed minutes: No rate moves are coming ‘for some time’ even if the economy improves”, 22May2019, https://www.cnbc.com/2019/05/22/fed-minutes-from-may-meeting.html.
- 7. Both indices as of 14Jun2019 with the Small Business Optimism measured by the National Federation of Independent Business’s May 2019 Business Optimism Index (https://www.nfib.com/surveys/small-business-economic-trends/ ) and the Consumer Sentiment as measured by the University of Michigan’s Consumer Sentiment survey to the right of the commentary on page 1.
- 8. Bloomberg, Dow Jones Commodity Index Crude Oil 14Jun2019. Designed to track the Brent Crude market through futures contracts. All Dow Jones Commodity Indexes are broad measures of a commodities futures market that emphasizes diversification and liquidity utilizing an equal-weighted approach.
- 9. Bloomberg, Fed Funds Futures Index 14Jun2019. Fed funds futures are used by banks and fixed-income portfolio managers to hedge against fluctuations in the short-term interest rate market. They are also a common tool traders use to take speculative positions on future Federal Reserve monetary policy.