by Connor Darrell CFA, Assistant Vice President – Head of Investments
As was widely anticipated by markets, the Federal Reserve opted to reduce its target interest rate by 0.25% last week. However, the dovish pivot was not enough to support equity markets, which ended the week in a downswing following a series of tweets from President Trump which indicated he was moving forward with an additional round of tariffs on Chinese goods. That this announcement came just one day after the Federal Reserve’s interest rate decision is likely no coincidence, as the Fed’s accommodative stance will provide the President with greater confidence that the economy can withstand the consequences of upping the ante with the Chinese.

With the confirmation that interest rates would slide downward and the increase in equity volatility stemming from President Trump’s tariff announcement, the bond market managed a small rally last week. The Barclays Aggregate Bond Index is now in the midst of one of its strongest years since 2011. 

Global Manufacturing in Contraction
Purchasing Managers’ Indices (which utilize survey data to evaluate business confidence and manufacturing activity) released last week revealed that global manufacturing activity remains challenged by the uncertainties posed by the U.S.-China trade dispute and Brexit negotiations. The U.S. PMI remains the only major region that has held above 50 (a critical level which separates expansion and contraction), though it has declined materially over the last several quarters. PMIs in the eurozone, Japan, and China all remained below 50 last month, indicating that these manufacturing markets are in contraction. 

Manufacturing is far more cyclical than top line economic growth, but the reduction in global manufacturing activity that we have observed over the past year is a symptom of the toll that mounting geopolitical uncertainties are having on business decisions. If businesses’ reluctance to invest in production permeates into hiring decisions, it could begin to impact labor markets and accelerate the arrival of the next recession. Given the relative health of the U.S. economy and the potential for these uncertainties to be lifted by a simple handshake between Presidents Trump and Xi, this scenario looks a long way from playing out.  But for investors who have achieved double digit returns in a year where the economic backdrop has continued to weaken, this type of data should not be ignored and may represent a reminder of the prudence of maintaining discipline and avoiding the urge to chase returns during late cycle investing.

by Connor Darrell CFA, Assistant Vice President – Head of InvestmentsThe S&P 500 led global equities forward last week as the market’s focus began to turn once again toward monetary policy. In Europe, the ECB indicated that it would reduce short-term interest rates in September in an effort to stimulate the eurozone’s softening economy. Meanwhile, the Federal Reserve is widely expected to take a similar course of action when it meets this week.

Also weighing on global equity returns was mounting uncertainty surrounding the ongoing Brexit saga. Boris Johnson, who has pledged to deliver on 2016’s Brexit referendum with or without a concrete deal in place, won the race to become the next Prime Minister of the United Kingdom.

All Eyes on the Fed
At this week’s meeting, the Federal Reserve is widely expected to cut short-term interest rates by at least 25 bps. However, the bond market has had this expectation baked into current prices for several weeks now, and any market movements are likely to be driven by the forward outlook for monetary policy, which will likely be discussed during the press conference on Thursday. At present, markets are anticipating more than two rate cuts before the end of the year.

Whether or not the market’s expectations for monetary policy are met will be largely contingent upon the strength of economic data between now and the end of the year. Last week, it was reported that the U.S. economy expanded at a rate of 2.1% annualized, which was on the upper range of consensus expectations. That growth was supported by very strong consumer spending, which more than offset a slight decline in business investment. Business investment has remained an area of weakness in recent GDP figures around the world (primarily as a result of uncertainty surrounding trade policy), but the strength of the consumer continues to help keep the U.S. economy on a solid foundation. Furthermore, with face-to-face trade talks resuming between the U.S. and China this week, there is some optimism that progress can be made. Any meaningful progress on trade would likely improve business confidence and could begin to push business investment trends back in a positive direction.