Bottom line: The economy is showing a few cracks – as we anticipated from the get-go of the Trump Administration if indeed he made good on his tariff threats – but, while some of those cracks are widening, we’re not staring down data that’s yet screaming “recession ahead”. Therefore, given the data, anything other than an acknowledgement of where the cracks are forming, and a straightforward commitment to adjusting policy if/when necessary, is all that would be called for.
Ah, but here’s the thing, if trade tensions do not let up, markedly and soon, the newly-created cracks will continue to widen and branch out into other areas of the economy, and, thus, I believe the data will indeed be screaming “recession ahead” in the not-too-distant future.
There’s a reason why 300+ U.S. businesses (employers) are descending onto Washington this week, most of them pleading with the Administration to end all trade wars ASAP! And, make no mistake, the Fed feels their pain.
My best guess is that, while there’ll be no cut at this meeting (well, it’s possible, but I’d be very surprised), there’ll be real hints of some coming in the not-too-distant future, and the market will welcome it. And then there’s next week’s Trump/Xi summit to contend with…
As I type (1 hour before the market opens) equity futures are pointing to a strong open this morning. They went from red to strongly green when the ECB’s Mario Draghi spoke at his institution’s annual forum, stating that “additional stimulus measures will be required” if the euro area economy doesn’t improve.
Oddly, but perhaps not surprisingly (and not encouragingly in terms of trade negotiations to come), Trump blasted the move as unfair to the U.S., as Draghi's comment immediately sparked a selloff in the Euro. Trump’s contention is that it smacks of currency manipulation and gives Europe an unfair advantage (btw a strong U.S. dollar is really good for the U.S. consumer). Perhaps he should’ve noted the immediate rally in U.S. stocks before he fired off that tweet.
P.s. Housing starts data for May was just released and came in better than expected. Futures immediately moved a few points lower (click chart below to enlarge). The market’s in no mood for good news at the moment; i.e., the bulls are aching for the Fed to signal lower rates ahead.