July-August
2019 Outlook: Summer Run Down
Tue, 09 Jul 2019 15:49 PM EST
As we progress through the back half of the year many uncertainties continue to
hang over the markets. In the months ahead, uncertainty will ebb and flow
around hopes for trade deals with China and other partners, as well as other
unplanned events such as a possible direct confrontation with Iran.
The key issue for the next couple of months will be the give-and-take between
the performance of the economy, domestically and internationally, and the Fed’s
decisions on monetary policy. Market expectations are still set on at least 50
basis points of Fed easing through year end, with some minor disagreement about
the timing. But if the data on employment remains favorable and inflation picks
up just a bit the Fed could extend its pause indefinitely rather than waste its
limited resources for easing that could be better used during a future economic
downturn.
Without further ado, here’s a list of some significant dates and events to
watch for this summer:
July 10: Fed Chair Powell testifies before Congress
The Fed has been under pressure from market participants and President Trump to
start cutting rates amid continued weak inflation and uncertainties over trade
issues and growth. Trump went as far as to call the Fed “our most difficult
problem.” Under this level of scrutiny, Chair Powell will have to tread
cautiously as he explains the Fed’s dovish turn despite a strong stock market
and a solid rebound in the June employment report. Powell may decide to stress
global concerns during his testimony, which would signal the Fed is on track
for a July rate cut. Should he push back against the notion of a July rate cut,
it could lead to an equity sell off.
July 11: US CPI data
The White House and many on Wall Street have argued that the Fed should focus
on price indicators rather than employment. CPI data has remained persistently
below the 2% Fed target, despite a healthy jobs market and the central bank’s
willingness to tolerate “symmetric” above-target inflation. This month’s
inflation data is expected to remain tame, but an upside surprise could curtail
hopes for Fed rate cuts this year.
July 16: Earnings season begins
Tuesday, July 16 is the unofficial kick off of the Q2 earnings season, as the
first big Wall Street banks report their results along with blue chip names
like JNJ. The bank stocks have struggled amid a decade of low rates and now
face the prospects of interest rates contracting again, an environment that
doesn’t give much hope for financial stocks to take a leadership role. Notably,
the embattled Deutsche Bank will report its results on July 24 as it continues
to attempt restructuring its way back to health. The US consumer still appears
to be healthy but there are some signs of a slowdown in committing capital at
the corporate level as executives contend with a high level of uncertainty
related to geopolitics and trade issues, so there is some expectation that
corporate earnings won’t show much growth.
July 17: Robert Mueller testifies before Congress
Mueller has said he will not provide any testimony that goes beyond the bounds
of his report, but for much of the general public this may be the first time
they hear the former special counsel describe the potential incidents of
obstruction of justice that were enumerated in his report. The testimony will
also include questions about the supporting materials that the report is based
on, which could lead to some more embarrassing details that could distract
President Trump from other matters (Trump has a campaign rally scheduled the
same day as Mueller’s testimony). If nothing really new comes to light,
however, this could be the last gasp for the impeachment movement among
left-wing Democrats as the 2020 election becomes the central focus of US
politics.
July 22: UK Conservatives announce result of leadership vote
The election of Boris Johnson appears to be a foregone conclusion, as he is
polling well ahead of his rival, Jeremy Hunt, despite an embarrassing domestic
incident at Johnson’s flat last month that raised some character questions. The
new PM will have his work cut out for him as he plans to somehow wrangle new
concessions out of the EU before the Brexit extension expires in October. EU
leaders have repeatedly said they won’t budge on the agreement made with PM
May, though there may still be some wiggle room in the implementation phase and
as new trade arrangements are established with the independent UK. The greater
threat is that PM Johnson, faced with no new concessions from Europe, will opt
for a ‘no deal’ Brexit, certainly the most disruptive outcome for global
markets.
July 26: US Q2 Advance GDP
The first reading on US Q2 GDP will be another key data point in calibrating
Fed policy. The Atlanta Fed’s Q2 GDPNow forecast has dwindled to just 1.3%
after recent disappointing readings on personal income and international trade.
In Q1, the Advance GDP number surprised to the upside – at 3.2% it was
five-tenths higher than the final GDPNow – adding some doubt to the predictive
value of the Atlanta Fed forecast.
July 31: FOMC rate decision
Fed funds futures are now overwhelmingly pricing in a 25 basis point cut at the
end of July. Fed rhetoric to this point has priced out the notion of a one-time
50 basis point ‘insurance’ cut to preempt a recessionary turn in the economy.
Even Bullard, the dissenter at the May meeting, has downplayed the notion of
moving more than a quarter point at a time given the generally strong economy.
The Fed is also loath to prematurely use up the ammunition it has built up over
the last two years, so the focus will move to whether the Fed has an appetite
to provide more cuts in September and December as the futures markets are
predicting. During his post-decision press conference, Chair Powell will likely
be cautious about promising more rate cuts until he sees the incoming data and
developments to the outlook.
August 2: US employment report
Apart from a US/China trade deal, more strong jobs data is the event that could
likely ease pressure on the Fed to cut rates this autumn. The solid non-farm
payrolls rebound in the June data took some of the wind out of the sails from
pundits who were banking on a series of rate cuts this year. If the next few
payrolls reports confirm continued labor market strength, the Fed will be at
liberty to dial back its dovishness, especially if there are some signs of wage
inflation accompanying the jobs data. In the alternate case, should payroll
growth start to ebb – as many economists predict when the labor market is at
‘full employment’ – the Fed could have more justification for additional rate cuts.
August 3: Congressional recess begins
The US Congress is out of session for all of August and the first week of
September, which means legislators have only a few weeks left to pass bills
this summer. The most pressing issues are related to spending, particularly
raising the debt ceiling. Technically the debt ceiling was already blown
through several months ago and the government is now relying on the Treasury
Department’s special measures to avoid default. A recent estimate from the
Bipartisan Policy Center said that the Treasury could breach the
borrowing limit in early September because the government has brought in
less tax revenue this year than was projected. The implication is that this
divided Congress needs to pass a debt ceiling bill before the summer break or
find itself with only a matter of days in September to act, a situation that
could send a chill through economic markets.
August 9: UK Q2 GDP
More signs of weakness in the UK economy because of Brexit uncertainty could
put pressure on the new PM to avoid a messy separation and perhaps ask the EU
for another extension, despite his campaign pledge that the separation must
occur by October 31 without further delay. Meanwhile unions are pushing the
Labour Party to seek a second referendum on approving the PM’s strategy of
either a new deal or no deal, and for Labour to openly campaign for scrapping
Brexit altogether.
August 21: FOMC Minutes; Fed Jackson Hole Symposium
The Fed will have another chance to massage market expectations for policy late
in August as it releases the minutes from the July meeting and as many senior
global central bank figures meet at Jackson Hole. If the data and sentiment
have deteriorated by late August, Fed speakers could start signaling a
willingness to provide more accommodation in the months ahead.
Early September: Iran threatens to further reduce nuclear compliance
After announcing it would increase enrichment of uranium past the 3.7% cap
required under the JCPOA nuclear accord it was reported that Iran plans to
incrementally scale back commitments to the 2015 nuclear deal every two months
to keep up pressure on European leaders. The enrichment level is still well
below the 20% threshold needed for a nuclear bomb, but makes it clear Tehran is
willing to chip away at the JCPOA as it faces continued economic pressure from
American sanctions. With tensions already mounting from tanker attacks
reportedly carried out by Iranian proxies and the downing of a US surveillance
drone, it seems like it may only be a matter of time before Iran crosses a red
line that provokes a military response from the US.
Later 2019: US/China Trade Deal?
US/China trade discussions may go into a quiet period with no significant
pressure to reach any conclusions perhaps until Trump and Xi are expected to
see each other again at the mid-November APEC leaders’ summit in Chile. Both
leaders still want to forge a trade agreement of some kind, and the sides were
reportedly agreed on 90% of the details before talks fell apart earlier this
year. That would seem to indicate that a breakthrough could come at any time,
as long as the leaders are willing. Mr. Trump’s resolve to get an optimal deal
is stiffened by the strength of the stock market, his primary metric for his
own Presidency, but he would probably like to get a resolution to the China
trade dispute to bolster his credentials for re-election as the businessman
President. Mr. Xi is feeling some economic and political pressure back at home
but remains firmly in control and could still conceivably try to ‘run out the
clock’ on the Trump Administration and take his chances with a potential
Democratic White House in 2021. Beijing may be seen as backsliding if it
escalates restrictions on US companies with manufacturing operations in China
or steps up rhetoric related to Taiwan and the South China Sea. Any signs that
the two sides are actually getting close to sealing a deal will boost the
animal spirits of the markets, though it should be noted that President Trump
seems eager to open up new fronts in the trade war with India, Vietnam and the
EU (he has described the latter two as “even worse” than China on trade).
CALENDAR
JULY
8:
9: Fed Chair Powell and Fed dissenter Bullard speak; China CPI
10: UK May GDP; UK Manufacturing Production; Fed Chair Powell Congressional
testimony; FOMC Minutes
11: BOE Financial Stability Report; ECB minutes; US CPI; China Trade
Balance
12: US PPI
14: China Industrial Production
15:
16: UK Unemployment Rate; German ZEW Economic Sentiment; US Retail Sales; China
Q2 GDP
17: UK CPI; US Housing Starts & Building Permits; Robert Mueller
testifies before Congress
18: UK Retail Sales; Philadelphia Fed Manufacturing Index
19: Preliminary University of Michigan Consumer Sentiment
22: EU Flash Manufacturing & Services PMIs; German Ifo Business Climate; UK
Conservatives announce result of leadership election
23:
24:
25: ECB Monetary Policy Decision; US Durable Goods Orders
26: US Q2 Advance GDP
29: BOJ Monetary Policy Decision
30: German Preliminary CPI; US Personal Income & PCE Price Index; US
Consumer Confidence; China Manufacturing &Non-manufacturing Indices
31: EU CPI Flash Estimate; Chicago PMI; FOMC Monetary Policy Decision;
China Caixin Manufacturing PMI
AUGUST
1: UK Manufacturing PMI; BOE Inflation Report; BOE Monetary Policy Decision;
US ISM Manufacturing PMI
2: US Payrolls & Unemployment
3: Congressional recess begins
5: UK Services PMI; US ISM Manufacturing PMI
6:
7:
8: China CPI
9: UK June & Q2 GDP; UK Manufacturing Production; US PPI
12: China Trade Balance
13: UK Unemployment Rate; US CPI; China Industrial Production
14: German Preliminary Q2 GDP; UK CPI
15: US Retail Sales; Philadelphia Fed Manufacturing Index
16: US Housing Starts & Building Permits; Preliminary University of
Michigan Consumer Sentiment
19:
20: German ZEW Economic Sentiment
21: FOMC Minutes; Fed Jackson Hole Symposium (21-23)
22: ECB Minutes
23: EU Flash Manufacturing & Services PMIs; German Ifo Business Climate; US
Manufacturing PMI
26: US Durable Goods Orders
27: US Consumer Confidence
28:
29: German Preliminary CPI; US Preliminary Q2 GDP
30: EU CPI Flash Estimate; US Personal Spending & PCE Price Index; Chicago
PMI; China Manufacturing & Non-manufacturing PMIs
