July 22, 2019 — The Market Anticipates a Rate Cut Next Week


The Federal Reserve is meeting next week to announce whether an interest rate cut is warranted given the current state of the US economy. 

A required cut is not obvious, as data is not indicating a recession. The US stock market is strong, job growth remains steady, unemployment is at historical lows and the US consumer keeps spending.  In fact, the US economy seems to be returning to consumer driven growth as stronger than expected June retail sales data was reported last week. Overall retail sales in Q2 were up 7.5 percent annualized, the strongest since the fourth quarter of 2017. This is impressive, as retail sales rose a scant 1.2 percent in the first quarter of this year.

However, a slowing global economy, the potential consequences of trade policy and pullbacks in manufacturing could create problems.  The global Purchasing Managers’ Index contracted in May and June for 18 of 30 economies, while US manufacturing expanded at a slower pace. In a report last week, US factory output declined at a 2.2 percent annualized pace in Q2.

Financial markets are pricing in, with 100 percent certainty, a 25 bp reduction in the bank rate at the Fed’s July 30-31 meeting.