The news from the highly anticipated Federal Open Market Committee (FOMC) meeting during the week indicated that interest rates in the U.S. will remain as is for the immediate future. Although global market participants were not anticipating an interest rate cut at the latest meeting, the expectation was set high that comments pointing to a cut at the July meeting, or especially for the September meeting, would be almost guaranteed. That wish turned out to be a reality given comments from Fed Chairman Jerome Powell. The minutes from their June meeting indicated that the Fed “will act as needed to sustain future growth” and to not diminish the current prospects of the economy. Market participants immediately deciphered the data as dovish, which implies the expectation for lower interest rates in the future. Following the release of the minutes, market-based probabilities of an interest rate cut, as depicted by futures contracts tied to the Federal Funds interest rate, pointed to three possible interest rate cuts for 2019 with a probability assessment of 100% for each of the next three meetings. Investment grade bonds rallied to the upside on such news and caused the Bloomberg Barclays Aggregate Bond index to gain 0.44% for the week, a substantial gain. The index has gained over 5.65% year-to-date, a tremendous return on such an asset class, and a figure that was largely unimaginable at the beginning of the year. For those investors that have not accepted full equity market participation in 2019, the high returns within fixed income portfolios have been a true gift when considering the strong gains within global equity markets. As we look ahead to July, our internal assessment is one of an accommodative monetary policy yet we’re slightly more cautious on the ability of fixed income assets to gain further value. If Fed controlled interest rates do drop, the likelihood of a stronger drop to the 10-year yield may be muted given that it has already been depressed at notable levels. It’s possible that upside to the 10-year yield prevails through the remainder of the year, despite a decrease in the Fed Funds interest rate. Such an internal expectation may result in lower values for fixed income portfolios given that interest rates and bond prices maintain an inverse relationship.
Global equity markets welcomed the news of potential interest rate cuts by the Federal Reserve as market participants pushed risk assets higher. The all-important FTSE All World Equity Index gained 2.38% for the week, boosted higher by international equities more so than domestic equities. The appeal for international assets to outpace U.S. assets may have to do with the benefit of lower interest rates to global trade. Many debt instruments and trade contracts globally are dollar denominated, especially in emerging markets, and tend to benefit from lower U.S interest rates. Moreover, the Fed’s willingness to attempt and maintain economic growth in the U.S. may have a direct sentiment spillover effect to international equities, many of which remain reliant on a healthy U.S. consumer. It remains unclear as to how the potential trade tariff discussions will impact sentiment, but it appears that negative rhetoric may be on hold for the very short-term. President Trump’s upcoming meeting with China’s president at the G-20 will undoubtedly yield more answers. Whether they’ll be positive, or negative, remains an uncertainty.
In other news, we learned during the week that Empire manufacturing data, which reflects activity in the New York, New York, region, declined notably worse than had been anticipated. Such data follows the broader trend of short-term manufacturing data. A resolution to trade talks will likely be needed before a decisive trend can truly impact economic growth.
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