With the latest bouts of volatility oscillating the capital markets, investors will no doubt hang on every word of Federal Reserve Chairman Jerome Powell’s speech at the Economic Club of New York at noon E.T. on Wednesday, but the economy may be more robust than it appears.
October sell-offs were met with a much-need rally following November’s midterm elections, but more volatility returned prior to Thanksgiving, causing investors to fret over when this latest market correction would finally come to a close. Nonetheless, some analysts postulate that despite the latest turbulence, the economy is actually exhibiting strength.
“A stronger dollar, weak gold prices, and volatile risky assets look inconsistent with the idea that investors now have more dovish perceptions of the Fed,” Goldman Sachs Group Inc. Strategist Zach Pandl wrote in a note published ahead of Powell’s speech. “In recent weeks, even as nominal front-end rates have repriced, our multi-asset model has interpreted market signals as consistent with a more hawkish monetary policy outlook.”
Even if Powell manages to quell investor fears, the capital markets may need one more trigger event to restore confidence and that could be the forthcoming meeting between U.S. President Donald Trump and China president Xi Jinpging at the G-20 Summit in Buenos Aires. If the two economic superpowers can settle their trade differences, it could send the markets soaring once again.
“Comments from Larry Kudlow that there is a lot of communication with China ahead of the G20 Summit and that Trump thinks ‘There is a good possibility’ an agreement can be reached have markets feeling positive vibes,” said Brian Gilman of Virtu Financial.
Still, the latest remarks from the president himself and the Fed are giving investors pause.
Jim Cramer: Trump Sees ‘Cracks’ in Economy
President Trump’s recent interview with the Washington Post gave market maven and CNBC “Mad Money” host Jim Cramer enough insight to identify Trump’s tell in a high stakes poker game of economic policy in which he saw the president rattled by the latest rumblings in the economy. With the recent news of automaker General Motors announcing plans to slash 14,000 jobs and shutter five facilities in North America, Cramer noticed the president’s uneasiness when discussing the topic.
Furthermore, as has been the norm with every rate hike, Trump also took the time to lambaste the Federal Reserve for their rate-hiking policy, but even they might be starting to exhibit signs of dovishness.
“I think there’s two camps and they’re both very exemplified by the president’s more coherent interview with the Washington Post where he basically said, ‘Listen, it’s not China that’s slowing us down–it’s the Fed,'” said Cramer. “It’s very interesting to hear all these people say that there is no slowdown. The president has been saying there’s no slowdown–he’s no longer saying that. He was rattled by GM yesterday.”
In the thick of the decade-long bull market that saw the major U.S. indexes reach historic highs, President Trump was quick to praise the latest market upswing as a byproduct of his presidency–mainly the corporate tax cuts that resulted in strong earnings spanning across most sectors. With the most recent volatility, however, the president may be starting to realize that the proverbial stock market party may be ending.
“I think he’s beginning to recognize that there are cracks in the strength of the economy that really came from his tax cuts,” Cramer added. “I think he’s starting to realize that ‘Holy cow, this could go away.'”
Fed Getting Cold Feet
Cramer’s assessment comes as various Fed members might be signaling otherwise, including those by the Fed Chair. Powell exhibited signs of cautiousness as he discussed the economy at a symposium with Dallas Fed President Robert S. Kaplan earlier this month.
“So, you know, a good example is — a noneconomic example would be you’re walking through a room full of furniture and the lights go off. What do you do? You slow down. You stop, probably, and feel your way,” Powell said.
In the meantime, Federal Reserve Bank of New York President John Williams is keen to sticking with hiking rates–somewhat.
“We’ll be likely raising interest rates somewhat but it’s really in the context of a very strong economy,” Williams said at a community event in New York on Monday. “We’re not on a preset course. We’ll adjust how we do monetary policy to do our best to keep this economy going strong with low inflation.”
In an interview with the Wall Street Journal this month, Federal Reserve Bank of Philadelphia President Patrick Harker was outright convinced that a December rate hike is not the most optimal move given the latest rumblings in the markets.
“At this point, I’m not convinced a December rate move is the right move, but I need to watch the data over the next few weeks before determining whether it is prudent to boost the cost of borrowing again.”
Despite the latest comments from his colleagues and recent volatility roiling the capital markets, Clarida shares Goldman Sachs’ view that the economy is still robust.
“U.S. economic fundamentals are robust, as indicated by strong growth in gross domestic product and a job market that has been surprising on the upside for nearly two years,” Clarida said.
For more trends in fixed income, visit the Rising Rates Channel.