Significant Risks

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by Blaine Dickason
Vice President, Fixed Income Trading

For the week, the S&P 500 returned -1.41 percent and the 10-year U.S. Treasury bond yield declined to 1.51 percent. On Friday, the S&P 500 fell more than 2.5 percent on news that China had escalated the trade war which was coupled with a similar response from the White House.

Friday morning, in a speech delivered at the “Challenges for Monetary Policy” symposium in Jackson Hole, Federal Reserve Chair Jerome Powell stated that while the U.S. economy is in a favorable place, there are now “significant risks” to sustaining our current record economic expansion. Fed Chairman Powell’s remarks were well-received by the markets as they were considered to be “dovish” enough and market expectations for further rate cuts moved higher following the release of the text from the speech.

In addition Powell Stated that “trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing and capital spending in the United States.” With the trade war, business confidence is suffering, which is risky for an economy that is closer to the end of the economic cycle than the beginning. On a positive note, Chairman Powell also pledged that “we will act appropriately to sustain the expansion” … which is precisely what the financial markets wanted to hear.

The Federal Reserve has consistently attested that they will take a ‘data dependent’ approach to setting policy ... which implies flexibility to setting monetary policy without adhering to a pre-determined path. Our central bank is now in the unenviable position of picking which data to set their course by as the numbers has been mixed. The economy is still growing, but at a slower pace and unemployment is not a problem at 3.7 percent. However, there are other leading economic indicators, such as the PMI index, that shows a further deceleration in the economy.

Current market expectations are pricing in an interest rate cut by the Federal Reserve at their next meeting and press conference scheduled for September 18. To that end, Chair Powell’s characterization of the present risks as ‘significant’ lead us to believe there will be more interest rate cuts to come.

Week In Review and Our Takeaways

  • The trade war continues to drag on and escalate which has impacted business confidence

  • The Federal Reserve is committed to sustain the economic expansion