Last week was a busy one on the economic and policy making front.
On Wednesday the Federal Reserve, in a widely expected move, lowered the benchmark fed funds rate by 25bps to a range of 2.0 – 2.25%. In addition, the FOMC halted the balance sheet runoff that was originally scheduled to take place this fall. Citing “the implications of global developments and muted inflation pressures,” the Fed is doing what it can to protect the domestic economy from the global economic slowdown that has persisted in recent months.
On that front, the domestic economy appears to be plugging along quite nicely. Friday brought us the nonfarm payroll report for July, which showed a gain of 164,000 jobs. The unemployment rate was unchanged at the historically low level of 3.7%, and wages showed some life, rising 0.3% m/m and 3.2% y/y, both higher than economists’ estimates.
Of course, these datapoints are now in the review mirror as we start the first full week of August. The Trump Administration’s announcement of tariffs on another $300B of Chinese goods, and China’s response this morning by depreciating the Yuan is driving markets . In a classic “risk-off” move, U.S. Treasuries are rallying sharply, equities are selling-off and corporate credit spreads are widening.
When the Fed cut last week, Chairman Powell described the move as a “mid-cycle adjustment” and emphasized the importance of global developments in the decision. With global developments now turning negative, we should expect the Fed to respond with additional cuts, as early as the next meeting in September (if not sooner via an inter-meeting cut). These actions should help to support the economy over the long-term but may not prevent short-term market volatility. This volatility is welcome news to investors that have kept portfolio positioning generally conservative as market opportunities may begin to present themselves. We’ll certainly be on the lookout as the “dry-powder” we’ve built up via our AA and AAA rated holdings can easily be deployed into lower-rated credits that are fundamentally sound but are being offered at a discount.
Related: Powell’s First CutSource: Bloomberg, Federal Reserve