One of the market’s chief obsessions in 2019 has understandably been the shifting stance of the US Federal Reserve in relation to the path for interest rates, with investors now pricing in a 100% chance of a rate cut at the end of this month. Now that the June FOMC minutes, Nonfarm payrolls, Jerome Powell’s testimony to Congress, the June CPI and PPI numbers and the Trump-Xi meeting at the G20 in Osaka are behind us, what is the next set of data that may shed some light on the Fed’s next policy move?
With the next FOMC meeting on July 30-31, and a few more economic data points to be digested before then, the upcoming corporate earnings season will be an important indicator as to the health of the US economy and to what extent this could weigh on a possible rate cut decision in July.
It is important to note that Powell fears “global cross-currents” and persistent trade tensions are continuing to weigh on the US economic outlook. To what extent will we see this fear manifest itself in upcoming corporate earnings, and perhaps more importantly, in the outlooks being provided by the CEOs?
The Q2 US earnings season starts this week, and we will be looking in particular for signs of slower earnings growth and business investment contraction. Given Powell’s comments – “Overall growth in the second quarter appears to have moderated. Many FOMC participants saw that the case for a somewhat more accommodative monetary policy had strengthened. Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the US economic outlook” – forward earnings guidance will very likely also be lower. Indeed, equity analysts have been busy trimming both their earnings expectations and growth estimates, though we note this has not stopped US equity indices from reaching record highs.
Q2 earnings data will therefore be very important and may well be the final driver influencing a 25bp rate cut at the end of the month, enabling the Fed to utilise the tools available to it in order to extend the current expansion into a tenth year.
With a “lower rates for longer” environment and slower growth anticipated to be reflected in forward guidance, we will continue to recognize an ageing cycle and we would expect to maintain our higher credit quality and shorter duration investment bias.