Weekly Market Update: Global Tensions Rise, Fed Expected to Clarify Stance
By: Nt Asset Management
Tags: Daniel Phillips, Inflation, Market, Federal Reserve

Weekly Market Update: Global Tensions Rise, Fed Expected to Clarify Stance

Last Week Review

Global equities began the week on a positive note as the U.S. decided not impose tariffs on Mexico. Global equities finished up 0.3% despite mixed economic data and rising political risks weighing on markets after the start of the week. Non-U.S. developed markets were the only major regions in negative territory, trailing both U.S. and emerging market equities. Global interest rates remain near year-to-date lows since the U.S. announced an increase in tariff rates against China. Ten-year government bond yields are low across key developed markets such as the U.S. (2.1%), U.K. (0.9%), Japan (-0.1%) and Germany (-0.3%).

U.S. Inflation Data Disappoints

Headline Consumer Price Index (CPI) data dropped to 1.8% year-over-year in May while core levels ticked down to 2%. After peaking in July 2018, inflation has generally trended downward and remains below levels targeted by central banks globally. 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. In other U.S. economic data, small business optimism surprised on the upside and consumer sentiment held close to the prior level.

Global Political Tensions Challenge Investors

Financial markets sorted through a number of political developments globally last week. First, the U.S. threatened to implement sanctions on the natural gas pipeline between Germany and Russia, representing another possible U.S. punitive action involving a traditional U.S. ally. Later 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. Finally, protests in Hong Kong continued over proposed legislation that would allow China to extradite and pursue legal charges against anyone in Hong Kong. Hong Kong currently operates under a separate legal system from China, but its status as a global financial center and location for multinational companies could come in question if the legislation is implemented.

Chinese Growth and Trade Indicators Mixed

Investors have been monitoring Chinese economic data closely since the U.S. imposed tariffs in 2018. Imports, industrial production and fixed asset investment in May fell from the previous month and below expectations. Retail sales and exports surprised to the upside. China’s fiscal and monetary policy to support growth has helped withstand significant trade pressures from the U.S.

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This Week Preview

Fed Expected to Clarify Policy Stance as Investors Call 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 dotplot 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. 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 cuts in late 2018 in an environment of low inflation. Investors will 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.

Manufacturing Expected to 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 may show small upticks across all regions. May Services PMI readings were all in expansionary territory and are expected to increase slightly in June. The growth environment remains important to investors as trade tensions have weighed on investor risk appetite. Weak growth readings would likely continue to push central banks globally to lean towards more accommodative policy stances.

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