In its FOMC minutes on Jun 19, the Fed kept interest rate unchanged while giving a clear indication that it will not hesitate to take appropriate action, when required, to sustain economic expansion. The central bank is concerned about global economic slowdown and lingering tariff war between the United States and China.
Tepid manufacturing data, lower business spending and muted inflation may compel the Fed to cut interest rates this year. Moreover, non-farm payroll in May was extremely low, signaling a possible halt in labor market growth, which was one of the key pillars of U.S. economic expansion.
Fed Signals Near-Term Rate Cut
On Jun 14, in his speech following the FOMC meeting, Fed Chair Jerome Powell said that the benchmark lending rate was kept intact at 2.25-2.5%. Fed’s fund flow rate projection chart is not showing any possibility of a reduction in rate before early 2020.
However, the noticeable fact is that out of 17 voting members of the Fed, a strong bunch of eight is expecting a rate cut this year, while another eight members are in favor of maintaining status quo. Only one member is expecting a rate hike instead of a rate cut.
Market participants feel the numbers are strong indication of one or more rate cut this year. In fact, several market watchers are expecting a quarter to half a percentage point cut in benchmark rate throughout the rest of 2019. Notably, the Fed has removed the term “patient’ from its minutes and added that “the FOMC will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion”.
The Fed has said that adoption of more accommodative policy is gaining ground as some economic developments raised concerns about U.S. and global growth. Meanwhile, traders are wholeheartedly expecting at least one rate cut in July. Per CME FedWatch, Fed funds futures market tool is pointing a 67.7% probability of a 25 basis-point reduction in fund rate while 32.3% probability of a reduction of 50 basis points.
Tepid Global Economic Data
Lingering trade conflict between the United States and China has already dented investors’ confidence internationally. Non-farm job addition in May came in at just 75,000. Moreover, total job addition in April and March was reduced by 75,000.
U.S. manufacturing is suffering due to lack of global demand. The ISM Manufacturing Index for May came in at 52.1, the lowest level since October 2016. Factory orders for U.S.-made durable goods declined 0.8% in April. Additionally, U.S. core PCE inflation index – Fed’s favorite inflation gauge – rose 1.6% in April, well below the central bank’s target rate of 2%.
China’s official manufacturing PMI for May slipped to 49.4, from April’s reading of 50.1. PMI readings below 50 signal contraction in the Chinese manufacturing sector. The National Bureau of Statistics of China reported that value-added industrial output rose 5.0% in May compared with 5.4% in April. This was the lowest growth rate in 17 years.
Yields on 10-year Treasury bond in Germany, Switzerland and Japan are currently in negative territory. Moreover, yields on 10-year Treasury bonds declined to less than 1% in France, Spain and the U.K.
Our Top Picks
Under these circumstances, rate-sensitive investments like utilities, REITs and health care, with strong growth potential, will be prudent. We narrowed down our search to five such stocks, each carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows price performance of our five picks year to date.
Middlesex Water Co. MSEX owns and operates regulated water utility and wastewater systems. It operates in two segments, Regulated and Non-Regulated. The company has expected earnings growth of 10.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 5.9% over the last 60 days.
Atlantic Power Corp. AT owns and operates a fleet of power generation assets in the United States and Canada. The company has expected earnings growth of 50% for the current year. The Zacks Consensus Estimate for the current year has improved by 118.2% over the last 60 days.
NexPoint Residential Trust Inc. NXRT invests primarily in residential mortgage loans and mortgage-related assets in the United States. The company has expected earnings growth of 10.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.5% over the last 60 days.
Illumina Inc. ILMN provides sequencing and array-based solutions for genetic analysis. The company operates in two segments, Core Illumina and Consolidated VIEs. The company has expected earnings growth of 16.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.3% over the last 60 days.
BioDelivery Sciences International Inc. BDSI is a specialty pharmaceutical company, which engages in the development and commercialization of pharmaceutical products in the United States and internationally. The company has expected earnings growth of 80.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 33.3% over the last 60 days.
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