All eyes are on Washington this week, as the US and Chinese trade negotiations kick off, and investors are on edge to see if any meaningful truce can be called. Heading into the meeting, hopes dimmed with the US slapping on last-minute restrictions on several major Chinese companies and adding travel bans. Minute-by-minute news on the trade front has whipsawed markets as details emerge. Meanwhile, domestic data continues to soften, with US job openings weakening as employers cut back on hiring plans in the face of a dimming economic outlook. Ongoing political uncertainty with the impeachment inquiry as well as the ramping up of next year’s election has also kept some investors on the sidelines. On the other side of the Atlantic, Brexit remains completely undetermined, with a possible no-deal option still on the table. Treasury yields stayed low with all the drama, with global demand for safety fetching a premium.
The Federal Reserve remains tight-lipped about future policy for now, as the cross-currents facing the global economy do not lead them to either aggressively act to stimulate nor see a reason to raise rates to head off inflationary pressures. The recent minutes from their September meeting show a somewhat divided Fed, and many board members called for the chairman to make it clear that the hurdle for cutting rates further was getting higher. The Fed looks to be focused on their message of keeping their options open for now, not wanting to set in stone any path that they lay out at this time. Their biggest concern is the effects that trade is having on business investment, driving employment and future growth. We believe that the Fed will remain accommodative, cutting rates in October and then depending on data, trade, and Brexit between now and then, possibly again in December. As the impacts from the trade war have not yet trickled into consumer prices, inflation and producer prices remain at or below the Fed’s target rate, though the scheduled tariffs in the coming months could quickly push prices higher. The outcome of any deal could swing prices dramatically.
For now, we are not taking any actions in the portfolios, as we believe trade remains the biggest unknown at this time and has the potential to either push the global economy further towards recession or turn things around. Keeping our options open with plenty of liquidity and a defensive posture is our goal for the current market environment. If the two sides cannot come to an agreement that restores confidence, we expect continued weakness in global manufacturing, a drop in consumer confidence, and the potential for further weakness in employment. Even with this outcome, however, we believe the US can narrowly avoid a recession and continue on with very weak growth. Alternatively, if somehow a truce can be found between the two great powers, a pickup in confidence could put growth back on track and push risk assets higher. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.