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All eyes were on the Federal Reserve’s show in this blockbuster week, yet while he delivered the widely-anticipated cut to interest rates Chairman Jerome Powell still disappointed investors hoping he would signal more aggressive easing to come.
The first Fed cut since 2008 also did little to quell worries about lingering trade frictions -- which heated up Thursday with a new threat from the U.S. -- or to drown out a fresh round of weak data led by bad news out of Europe.
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The most highly anticipated Fed decision of the year yielded few surprises, yet markets didn’t quite get what they wanted and stocks dropped. Powell’s line on the reduction not being the start of a long series of cuts spooked investors -- even as he insisted that didn’t mean this necessarily is a one-cut deal, either. That sticking point is a further sign that Fed decisions will remain high-pressured for the markets at least through year’s end.
The Powell messages that were more well-received:
A focus on the fundamentals, with downside risks and the inflation shortfall leading the way and Powell assuring this wasn’t just about (politically charged) trade policyReassurance that there’s nothing posing a major near-term threat to the U.S. economy, monetary policy is working, and this cut had an insurance, risk management aspect to itAcknowledgment that trade policy uncertainty is greater than was expected, the Fed will use all its tools aggressively as needed, and -- in a small surprise -- balance sheet shrinking will end in August, earlier than previously announcedDefense of the Fed’s independence, saying the Fed never takes political considerations into account but also that they won’t conduct policy to prove that independence
Nevertheless, President Donald Trump, of course, wasn’t pleased.
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Now that the Fed has pulled the rate-cut trigger, further dovishness could be due globally. The Bank of Japan held policy Tuesday while signaling more willingness to add to easing, and elsewhere in Asia central bankers probably will be slower to follow the Fed on the way down than they were to follow it up.
Brazil’s wasted no time, adding a half-point cut into the mix Wednesday and pledging to do more for an ailing economy. Policy makers in the Gulf weren’t far behind, while the Fed wrong-footed the few remaining hawkish central banks.
Governments are still leaning hard on rate setters -- another ominous sign of waning firepower for the next global downturn, as Bloomberg Economics analysis shows. Mexico’s President Andres Manuel Lopez Obrador told Bloomberg he’d like more interest-rate cuts and Russia’s economic minister issuing an unusual warning about central bank inaction.
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Trump abruptly escalated his trade war with China, announcing that he would impose a 10% tariff on a further $300 billion in Chinese imports in a move set to hit American consumers more directly than any other in his trade wars so far. The U.S. president’s abrupt announcement Thursday and China’s subsequent vow to retaliate follows somewhat anti-climactic talks in Shanghai earlier in the week that ended with a plan to regroup in early September. The escalation also raises the risk of a global recession.
Asia’s still feeling the pain acutely, the July PMIs showed. Factory gauges in China and Japan added more bad news, and the export-heavy small economies of Singapore and Hong Kong are seeing storm clouds ahead. The U.S. is no longer a happy exception to the gloom and doom on our Bloomberg Trade Tracker.
Japan’s removal of South Korea from a list of trusted export destinations can’t help matters.
South Korea Exports Tumble Again in July as Trade Woes Drag OnSigns of End to Tech Slump Offer Hope to Asia’s EconomiesTrump’s Bid to Dismantle Global Trading System Poised for a Win
Old World Problems
It was a rough week for Europe, with data roundly adding gloom to the outlook and prompting Bloomberg Economics to see big stimulus coming from the European Central Bank in September. Growth and inflation hit the brakes, confidence wilted. The continent’s growth engine, Germany, saw an unemployment uptick while Bloomberg analysts project July saw a deeper growth contraction there. France and Spain added disappointments. And sterling’s slump is unlikely to carry a silver lining for the economy this time.
Europe wasn’t entirely alone, with sluggish animal spirits in India and housing increasingly out of reach for many Americans. Still, U.S. jobs numbers on Friday showed employers kept adding workers at a healthy pace in July.
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Chart of the Week
Measuring the Monetary Space for a New Round of Rate Cuts
(Updates with U.S. jobs number in ‘Old World Problems’ section.)
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