Rate cuts are in, 2019 is the year of the rate cut just months after we experienced rate hikes from the Federal Reserve in the United States. Why is now the time? Markets haven’t even crashed! We’re not close to a bear market (20% down off lows), we are near correction territory (10% down off lows). Why is the Fed cutting? More of a defensive measure to avoid the worst case scenario rather than as global economic data is suffering.
The current expectation is for two coming rate cuts in the upcoming quarterly meetings, currently, the Fed Rate is at 2.25-2.50%, with the expectation of a Fed Rate at 1.75-2.00% by the end of 2019. Could this be the beginning of Quantitative Easing and a near zero rate market environment?
There are many factors that come into consideration, they are:
- Global Economic Data
- Market Price
- Trade talks
- Key US Economic Data
- Global Central Bank Rates
- Trade Talks
In the following article, we will look at key economic figures in major economies and how they will affect the US decision to cut rates several times in the remainder of the year, based on market price. We will look at the coming FOMC meetings in June, September, and December of 2019, in which two out of the three are expected to be rate cut meetings. It was not too long ago that rates were “far from neutral” and with a harsh slump to close out 2018, that standpoint quickly changed. The hawkish tone of Powell, rate hikes every quarter, it seemed, markets could not handle the news and showed it. With such a harsh turn in sentiment, one could only wonder what propelled it? Was it data dependent? Or more so S&P 500 dependent, the market price was the only data the Fed was considering. Trump even admitted that if Jerome Powell was doing his job, the S&P 500 should be trading thousands of points higher. Did Jerome Powell really hint at a rate hike due to a market slump and tariff threats? Or is global data really indicating a downturn?
Rate Cuts 2019- Global Economic Data
Global economic data has been sputtering over the past few months mainly out of emerging markets, China and the United States. There are many factors to consider, in this report, we’ll go over the most concerning ones, mainly debt and capital flows, business confidence and global growth forecast over the past few months in 2019.
First things first, where is global economic growth headed? In 2019 we were expecting global real GDP growth of 2.9-3.0% and 2020 growth of 3.6%, however that has recently been readjusted…lower. We see a slump in recent years of GDP growth, globally and in both emerging and advanced economies. With Trade talks we see a further slip of GDP expected growth due to all of the tariffs being slapped! The expected global growth was revised lower down to 2.6% in 2019 from the expected number in 2019, advanced markets revised lower from 2.0% in 2019 to 1.7%. And emerging markets revised lower from 4.3% in 2019 to 4.0%. The chart below is pulled directly from IMF.org. It represents the real GDP growth and expected growth into 2024. The red line represents emerging markets, yellow global and blue advanced. There was a significant visual slump since 2010 and it has been continuing like that. The advanced GDP is expected to fall even further one can venture to guess it is due to trade talks and implications.
Chinese and US growth are a good sign of how the world economy might react, and how does this affect rate cuts? By easing monetary policy will generate more cash easily available for investment and increase in US economic growth and even world economic growth. With economic growth slumping in both the US and China rate cuts may be the only way the Fed can rescue the economy. The tension between the two nations stunt global economic growth as well, we’ll see how and why below. China’s growth rate is slowing down drastically (pictured below, thanks to Bloomberg) however it is still a lot more than the US growth rate. About double! The slump in one of the worlds largest economies affects the rest of the world as well considering that China contributes to 28% of the worlds economic growth.
With China and the US mid trade war, the two nations combined contribute to 38.5% of the worlds economic growth, and with these tariffs affecting growth, there is a worry that the global slow down may not have other sources to contribute to global GDP growth in the coming years. The Trade War is set to take out $455 billion from the worlds GDP in 2020 says the IMF.
global debt
different developed markets
global pmi
equity flows
global growth forecast
global business confidence
