By DAR Wong
In mid-July, the US’ DJIA soared to new historical high above 27,398 to stir up optimism among retail investors. The reason for the bullishness stemmed from expectations of an interest rate cut. However, the recent economic data showed that the US economy added 224,000 payrolls in June which was way above forecast, diminishing the urgency to slash rate by policymakers!
At the start of 2019, market analysts and traders were still expecting at least 2 rate hikes in the year. However, after President Trump repeatedly chided Jerome Powell, it seems that the Fed Chief may have finally caved to Trump’s demand of easing monetary policy to stimulate domestic growth and iron out the unfair advantage of weakening Euros and Chinese Yuan. Reflecting the sentiments, the US 10-year bond yield fell to an average of 2.0 percent and DJIA once again surged to historical levels.
Looking at the US economy, its GDP growth rate has grown from 1.9 percent in early 2017 to 3.2 percent in 2Q19. While President Trump accuses China and Germany for strong growth by manipulating their currencies to expedite exports, he continually brags about the strong growth the US economy has seen since he took over the office. Ironically, Trump is now favouring a weakere US Dollar in order to export more American goods!
Obviously, there is a dichotomy between the White House administration and the state governors: When the Government wants to boost the morale of American citizens, they typically hail at the strong US Dollar. But the situation reverses when a weaker greenback can improve export competitiveness in other parts of the world like Europe and Asia.
The dichotomy has been flagged by analysts and outlined below:
- If the US Government favours cheaper oil prices, as emphasized by President Trump, then a weaker US Dollar would produce an opposite effect.
- A strong US Dollar, yet as competitive against Euros, Yen and Yuan, could derail trade negotiations with European Union and China as it would only be logical to raise tariffs and protect income from outflowing.
- If the US Government wants the US stock market to keep making new high, there should be steady growth in blue chips for 2Q19 season. Domestic economy should encourage growth in building permits and home sales instead of stagnation.
In coming end July to early August, we’ll be seeing many corporate earnings reports from companies like Boeing, UnitedHealth Group, APPLE, Chevron and Goldman Sachs that will determine the trend going forward. Furthermore, the long-awaited FOMC meeting will be held on 30/31 of July with expectation of an interest rate cut. However, we have noticed the inverted curve in US Bond yields. Another rate cut will only tank the curve in worsening pattern and reveal a faster speed in a potential recession.
Technically, the Dow could trend higher to 27,700 if the above huge component stocks could sustain strong earnings in results season. Otherwise, a potential slide going below 26,700 in the Dow, could quickly precipitate into panic selling.
Moving into 3Q19, we actually do not foresee any rate cut in FED policy since the US 10 Bond yield is already trading on the low side. Hence, we will keep close observation on DJIA when the trend begins to make a downturn. In the unlikely event of a rate cut, we would see US Dollar value fall against Asia currencies, as well as a lift in general commodity prices. However, in such an event, the US Treasury Bond yield curve would tank, putting the stock market through a major correction to reflect the greater risk of recession.
~ DAR Wong is a veteran in global financial markets based in Singapore. The opinions are solely at his own. He can be reached at firstname.lastname@example.org