August Economic Update
The two dominate market forces as of late - the Federal Reserve and China - continued to control the market in July. The S&P 500 continued its upward trajectory with the S&P 500 gaining 1.31% as of the close on July31. The broad U.S. large-cap index managed to break through the psychological 3,000 mark and closed at a new record high of 3,025.86 on July 26. The rally was mostly attributed to modestly positive corporate earnings reports and the market anticipating the Federal Reserve’s interest rate cut. Now, in a matter of only a few days, short-term sentiment has turned negative with the intensification of the U.S. and China trade war. (1)
Tensions were re-ignited on July 31 when U.S. trade negotiators departed China without a trade deal and little progress made. The next day on August 1, President Trump announced he would impose additional 10% tariffs effective September 1 for the remaining Chinese exports which are currently exempt. In addition, the President threatened to go even further stating he could increase tariffs “well beyond 25%.” The tensions have now continued into the first full week of August, with President Trump alleging that China has manipulated its currency to almost a historic low. (2)
Interest Rate Cut
Anticipation was high all last month with the expectation that the Federal Reserve would offer a boost to the market in the way of an interest rate cut. The central bank did not disappoint and delivered its first rate cut in more than a decade. Typically, interest rate cuts occur when the business cycle is slowing. This led many to question why the Fed would implement such a move when economic data remains fundamentally strong. Speaking to the media, Fed Chairman Jerome Powell characterized the cut as a “mid-cycle adjustment.” Given the timing of the rate cut on July 31 and President Trump’s new tariff announcement on August 1, many speculated whether correlation was more than mere coincidence. (3)
Suffice to say, the China trade escalation will more than likely dominate the markets and news headlines this month with short to mid-term volatility continuing. Many are speculating that the Chinese government will likely be reluctant to any deal until after next year’s presidential elections. This would force President Trump to justify the market fluctuations while on the campaign trail, in addition to China potentially being able to negotiate a trade deal with a new President in 2021.