Kuwait: July 07, 2019
FED PAVES THE WAY FOR FUTURE RATE CUTS
The Federal Reserve as expected left interest rates on hold at 2.25-2.50% in June but paved the way for looser policy by dropping calls for ‘patience’ in future rate changes and committing to “act as appropriate to sustain the expansion”. Although recent economic activity data is by no means all bad, the Fed is mulling a rate cut as ‘insurance’ against a future slowdown, as well as low inflation, which was unchanged at 1.6% y/y in May on the Fed’s preferred core PCE measure and well below the 2% target. Financial markets – as well as President Trump – are increasingly expectant of looser policy, with futures markets certain of at least a 25bps cut in July and pricing in a 92% chance of at least 50 bps in cuts by year-end. However, some analysts believe that markets are getting ahead of themselves and the Fed’s own ‘dot plot’ projections still point to no change in rates this year.
Surveys of manufacturing activity have weakened and are among the Fed’s key concerns. The Empire State survey plunged into contraction territory in June while the closely-watched ISM manufacturing index slipped to just 51.7 having already slowed markedly since last year. The hope is that weakness is exaggerated by tariff and trade fears that need not materialize if US-China tensions can be diffused, while the more domestically-oriented service sector remains solid. Consumer spending for example rebounded to 4.4% y/y in April-May and consumer confidence remains at historically high levels backed up by 50-year-low unemployment of 3.6% and 3%+ earnings growth. Even so, with the economic expansion now the longest in US history at 121 months, a sizeable slowdown in GDP growth looks almost certain. ‘Nowcast’ estimates point to annualized GDP growth of only 1-1.5% in both 2Q19 and 3Q19, less than half of the 3.1% recorded in Q1, which was lifted by a strong rise in inventories.
GROWTH FEARS OVERSHADOW OPEC+ SUPPLY CUT EXTENSION
Concerns over the weakening global economy have pressured oil prices, even as OPEC+ extended its production cut agreement for nine months to March 2020. In June, oil prices had been whipsawed by opposing, bullish and bearish forces. Brent fell to its lowest level since January in mid-month as US-China trade tensions escalated before geopolitics – the attacks of ships off the Strait of Hormuz and Saudi infrastructure – and the long-awaited drawdown in US crude stocks pushed Brent back up to close the month up 3% at $66.6/bbl. The downing of a US drone by Iran and the subsequent abortive US airstrike and sanctions applied to Iran’s Supreme Leader Ali Khamenei only served to further raise oil’s geopolitical risk premium. However, Brent subsequently eased back to $62.4/bbl in early July as global growth concerns reasserted themselves.
CHINA LOOKS TO BOOST INVESTMENT AMID GROWTH CONCERNS
The Chinese government announced that it plans to further liberalize key sectors including finance and manufacturing as soon as next year, in a bid to prop up foreign investment inflows. The announcement comes amid signs of continued economic weakness, not least because of trade tensions with the US. Indeed, the latest PMI data came in softer than expected. The private Caixin manufacturing PMI slipped into contraction territory in June for the first time in months. The official manufacturing PMI also pointed to a contraction coming in at 49.4, unchanged from May’s reading. On the upside, the official non-manufacturing PMI was broadly unchanged at a decent 54.2. Meanwhile the renminbi, having fallen sharply in May on trade and growth concerns, was more stable through June, amid trade talk progress and US dollar softness.