Futures Imply Multiple Rate Cuts In 2019

For much of Q1 and the first month of Q2, global financial markets were relatively tranquil. This was positive for risk assets. The domestic economic data trend was lagging expectations, but the general trajectory of the U.S. economy was still positive. Perhaps more importantly in the near-term, it appeared that U.S. and Chinese officials were closing in on a trade deal that would put the largest macro risk of the past year to rest. However, as Q2 progressed, disinflation concerns emerged, leading some Fed leaders to suggest that insurance rate cuts might be necessary in order to boost inflation expectations. Fed Chair Jerome Powell was somewhat dismissive of these concerns following the May 1 FOMC meeting, but a tweet from President Trump the following weekend changed everything from a market perspective. The president effectively accused the Chinese of reneging on the bulk of U.S. demands in the final stages of the negotiations. On the following Friday, the tariff rate on more than $200 billion of Chinese imports was raised to 25%. This was a sobering bucket of cold water for equities and other risk assets, and Treasuries rallied sharply.

June At-A-Glance

• Trade worries contributed to increased market expectations of a Fed rate cut.
• Three events during the week of June 17 eased investor concerns and boosted risk assets.
• The FOMC did not cut rates at the June 19 meeting. However, updated forward guidance suggests more Fed leaders prefer multiple rate cuts in 2019, which is in line with current pricing in the fixed income market.

The White House followed up with targeting measures against Chinese technology interests, including a potential ban on the sale of U.S. technology components to Chinese telecom giant Huawei. More negative trade headlines followed in the ensuing weeks, including threats of tariffs against Mexico in order to force greater cooperation from the Mexican government in curbing illegal immigration to the U.S. (essentially weaponizing trade). With risk sentiment snowballing, fixed income markets priced a greater probability of Fed rate cuts in 2019, with a July cut a high likelihood. In fact, prior to the June 19 meeting, fed funds futures were pricing for two rate cuts by year end. In the days that followed, futures implied approximately three cuts.

This market overview is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Read more from ALM First about the latest economic data releases and overall market trends at Trustcu.com.