President Trump has consistently, vocally trashed the monetary policy work done by his handpicked Federal Reserve chief Jerome Powell. Powell has taken it in stride, at least out in public settings.
But now, the dynamic D.C. duo may finally be on the same page — if not technically meeting up to map an attack plan on how to jumpstart the slowing U.S. economy (the Fed is an independent body, as Powell reminds us all frequently). Investors stand to be the ultimate beneficiary of the tag team’s efforts — at least as it unfolds in October.
On the Trump side of things, there are emerging indications his administration is nearing some form of trade deal with China. Whether it’s a partial deal that sees tariffs set to kick in on October 15 and December 15 pulled off the table, or one more comprehensive plan where some existing tariffs are also dialed back, there is no doubt it would be welcome news for equities markets.
The action would remove a major source of headline risk that has existed since Trump unleashed his trade war on China over a year ago. For Corporate America it would bring a sense of certainty in an operating backdrop that has been all about uncertainty, many market pros tell Yahoo Finance.
And with all of that, there deserves to be re-pricing of risk assets like stocks because of the high probability of re-accelerated growth in the U.S. and China. The powerful Friday rally on Wall Street — that saw the Dow Jones Industrial Average surge more than 400 points at one point — underscores that line of thinking.
“We have to get a positive surprise on trade, meaning existing in place tariffs are reduced not just promising not to do more. That would be a positive surprise,” Sevens Report Research founder Tom Essaye said on Yahoo Finance’s The First Trade on what would really get stocks surging off trade headlines.
Powell will likely stay on course
The other piece to this equation is no doubt Powell. While a trade deal of any kind would be welcome news to traders who play the headlines, the fact is it doesn’t guarantee U.S. economic growth ignites overnight. It doesn’t mean the U.S. manufacturing recession ends with the flip of a switch. And it doesn’t mean U.S. farmers start making money again.
Hence, what appears to be sub 2% GDP U.S growth rate into the first quarter of 2020 — and trade policy that could still turn at the drop of a Trump tweet — likely means Powell will have to stay the course with at least one more interest rate cut this year. If the Fed is as data dependent as Powell says is the case, the economic data on the U.S. will probably continue to suck into year end.
Sucky data, more rate cuts. Higher stock prices.
“We get the rate cut [later this month] because we still have a yield curve inversion and the Fed has to dis-invert the curve,” BNY Mellon Chief strategist Alicia Levine tells Yahoo Finance. “The data continues to be weaker than expected in the U.S. and the manufacturing data has already been in decline but now you are looking at the consumer and services sectors that looked a little weaker in September.”
Welcome to modern day investment decoding.