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Will the Fed Cut Rates This Week? For the week of July 29, 2019

Key Market Data

07/19/2019 07/26/2019 One Week Change YTD One Year
S&P 500 Index 2,976.61 3,025.86 +1.65% +22.06% +8.81%
MSCI EAFE Index 1,918.88 1,914.68 -0.22% +14.14% -0.89%
Barclays Capital U.S. Aggregate Bond Index 2,172.01 2,171.34 -0.03% +6.09% +7.97%
10-year Treasury Note Rate 2.056% 2.071% +1.5 basis points -61.4 basis points -90.6 basis points

Confidence that the Federal Reserve will lower its benchmark rate, upbeat news about earnings, and a better than expected report for second-quarter GDP helped drive the major indexes last week, with the S&P 500 and the Nasdaq both hitting record highs on Friday. Twitter and Alphabet led the way, gaining 8.9 percent and 9.6 percent, respectively. Alphabet added a staggering $79 billion in market value.

Mixed GDP News

GDP growth for the second quarter came in an annual rate of 2.1 percent, down from 3.1 percent in the first quarter. On the plus side, consumer spending jumped at an annualized rate of 4.3 percent, much improved from the 1.1 percent advance in the first quarter. But nonresidential fixed investment fell 0.6 percent on an annualized basis, the first such contraction since the first quarter of 2016. The drop suggests businesses may be reluctant to spend. Exports fell 5.2 percent. President Trump tweeted that the figure was “not bad” given the “very heavy weight of the Federal Reserve anchor wrapped around our neck.” This initial reading for second-quarter GDP will get revised several times. Case-in-point, the government also just revised its estimate for GDP growth in 2018, saying it was 2.5 percent, down from the previous estimate of 3 percent.

The Fed and the European Central Bank (ECB)

The Fed is expected to lower its key interest rate by a quarter percent when it meets this week — it would be the first rate cut since 2008. Some, including the White House, think the Fed should go further with a half-point cut. Either way, the prospect of a lower rate has buoyed investors over the past few weeks and is likely to move markets this week.

Meanwhile, the ECB decided last week to leave its interest rate unchanged. However, the ECB said it was “determined to act” if inflation remains below 2 percent, which is the bank’s target. The ECB’s steps could include reinstating its bond-buying program and lowering its benchmark rate, already negative, as soon as its next meeting in September. Despite concerns, the ECB’s outgoing President Mario Draghi said the odds of a recession in the Eurozone were “pretty low.”

More Meetings on Trade

Negotiators from China and the United States will meet this week in Shanghai to discuss trade, but hopes for progress were muted after both sides seem to have dug in. There was plenty of news on the trade front, however. First, President Trump complained that the World Trade Organization allows China to claim the status of being a “developing country,” which results in preferential treatment. In addition, Trump said he wouldn’t grant Apple a waiver of tariffs on computer parts imported from China, tweeting, “Make them in the USA, no Tariffs!” And the White House announced it would give farmers hurt by the trade war $16 billion in aid.

The European Union chimed in last week, saying it would impose $39 billion in tariffs on American goods if the White House went ahead with tariffs on European cars and car parts in November. Trump threatened to hit France with tariffs on wine after it passed a new digital tax on American tech companies.

Meanwhile, the International Monetary Fund, citing the ongoing impact of the trade wars, again cut its forecast for global growth in 2019, this time to 3.2 percent from April’s 3.3 percent.

The Debt Ceiling

Despite grumbling from Republicans, the House passed the bill to raise the debt ceiling and set spending at $2.7 trillion for the next two years. President Trump has endorsed the deal and the Senate is expected to approve it this week before Congress begins its summer recess. The bill will eliminate any confrontation over the debt ceiling until after the 2020 election and also help Congress avoid the automatic spending cuts negotiated as part of the Budget Control Act of 2011. President Trump said it was “a real compromise” with “no poison pills.” However, many Republicans were concerned that the deal doesn’t address the growing $22 trillion federal deficit or the deficit for the current fiscal year, which may pass the trillion-dollar mark.

Boris and the Brexit

The ardent Brexiteer Boris Johnson succeeded Theresa May as Britain’s prime minister last week and, as expected, stocked his new cabinet with pro-Brexit loyalists. Great Britain has until Oct. 31 to agree on the deal to leave the European Union and Johnson said, “We’ll do a new deal, a better deal, that will maximize the opportunities of Brexit.” He added that Great Britain was entering a new “golden age” that would make it the “greatest and most prosperous country in Europe” by 2025. Johnson said, “We are now committed, all of us, to leaving the European Union on October 31st or indeed earlier — no ifs, no buts.”

T Mobile and Sprint Merger Greenlighted; Durable Goods Orders Rise

The government gave the greenlight to the $26 billion merger between Sprint and T-Mobile on the condition that they sell some assets to the Dish Network. Even so, some states are still considering challenging the merger on antitrust grounds. Sprint and T-Mobile are the third and fourth largest cellular companies.

In other news, orders for durable goods rose 2 percent in June from May thanks in part to orders for commercial aircraft (up 75 percent) and cars (up 3.1 percent). Orders for nondefense capital goods excluding aircraft advanced 1.9 percent. Existing home sales fell more than expected, off 1.7 percent according to the National Association of Realtors, to an annualized total of 5.27 million. However, after two months of declines, new home sales surged 7 percent in June from May to an annual rate of 646,000. And first-time jobless claims for the week ending Jul. 20 fell 10,000 to 206,000; the four-week moving average declined 5,750 to 213,000.

A Look Ahead

Though the Fed’s rate decision will occupy centerstage this week, there will also be more second-quarter earnings news as well as a flurry of economic updates, including the latest on personal income, personal consumption expenditures, the S&P CoreLogic Case-Shiller home price index, pending home sales, consumer sentiment, the Institute for Supply Management’s manufacturing index, construction spending, vehicle sales, the trade balance, factory orders, and, on Friday, the unemployment rate for July, expected to remain unchanged at 3.7 percent.

Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.