Interest rates have been the primary focus of investors lately, and for good reason. A glance at the chart of the 10-year Treasury note yield below shows that while rates have been steadily declining for nearly a year, that move accelerated sharply during the last two weeks.
In last week’s commentary I mentioned that the Treasury does a biannual review on the currency practices of foreign governments. In five such reviews under the Trump administration, the Treasury department has declined to label China as a currency manipulator. That all changed yesterday.
Mr. Powell and the Fed continue to claim that their actions are data-dependent, but the question is beginning to arise: What data are they dependent on? The fact that many Fed officials have referred to this as an “insurance cut,” almost by definition suggests that fundamental economic data doesn’t justify a move lower.
The International Monetary Fund just released their quarterly update to the World Economic Outlook, and now projects real global economic growth to slow to 3.2% this year (from 3.6% in 2018 and 3.8% in 2017). Interestingly, the main downgrades in growth were concentrated in emerging market economies, including India, Russia, Mexico and Brazil.
Jerome Powell’s testimony last week offered no pushback against rate-cut expectations, and if anything, actually stoked the fire. Bets of a 50 basis point cut, as opposed to 25, rose, indicating the market shifted to an even more dovish stance.