Aug 2, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

So much news this week and so little space to write about it.  Where to start?  The Federal Reserve cut interest rates for the first time in ten years, trade talks with China deteriorate with new tariffs coming, mixed economic data galore, and a feeling that investor sentiment is being tested.  Let’s get started.

The big news this week, albeit not a surprise, was that the Federal Reserve decided to cut interest rates 0.25% for the first time in over ten years.  In “normal” times, this would have been followed by a large increase in the markets.  However, markets swung six-hundred points on the day to finish three-hundred points lower.  Turns out the message was more important than the act.  In this case, Jerome Powell, head of the Federal Reserve, laid out an ambiguous and confusing statement after the announcement that led many to believe the Fed isn’t going to pursue a change in policy after all, but instead this rate cut was a one-and-done event.  That was not pleasing to investors who want the wind of the Fed at their backs, and 98% of whom expect a second rate hike in September.  Before the market had time to digest the Fed’s statement, the other shoe fell.

After the Fed announced it was going to lower interest rates, the President took the opportunity to go on the offensive with China.  .  He tweeted that come September 1st, if no agreement is reached in the trade negotiations, the U.S. will impose an additional 10% tariff on $300 billion of good coming into the United States.  This sent the market reeling again with a few industries taking it especially hard, i.e. auto suppliers, semiconductor stocks, apparel & footwear companies, and the energy sector.  To be fair, the President has been patient in waiting for China to increase agriculture imports, namely soybeans, and to reduce the export of Fentanyl (a widely abused opioid).  China had agreed to these items in the last round of negotiations, but took no action to implement the agreement.

To add to the turmoil this week, the economic indicators did little to appease investors.  The takeaway is that consumers are strong but manufacturing is weakening.  Here’s a rundown of the economic indicators released this week.

  • Stronger-than-expected
    • July Consumer Confidence 135.7 vs 125.0 consensus
    • July Consumer Expectations 90.5 vs 90.3 consensus
    • July ADP jobs report 156K new jobs (more than 112K in June)
    • June Personal Income rose 0.40% vs 0.30% expected
  • In-line
    • July Nonfarm Payrolls 164K new jobs (but June was reduced by 31K)
  • Weaker-than-expected
    • Current Economic Conditions 110.7 vs 111.6 expected
    • Jobless Claims rose by 8K to 215K
    • July Dallas Fed manufacturing survey -6.3 vs -5.0 consensus
    • July ISM manufacturing index 51.2 vs 51.9 consensus
    • July Chicago PMI 44.4 vs 50.5 consensus (weakest level since 2015)
    • June factory orders rose 0.60% vs 0.80% estimate

Another piece of news that I found interesting this week is the question of where exactly the farm aid is going.  More than half of the $8.4 billion in trade aid payments to U.S. farmers through April was received by the top 10% of recipients, the country’s biggest and most successful farmers.  The top 1% of aid recipients received an average of more than $180K while the bottom 80% were paid less than $5K in aid.  Say what you will but it pays to be big.

In another interesting theme I read a lot about this week, we see artificial intelligence (AI) being used in new and innovative ways.  JPMorgan Chase signed a 5-year deal with Persado to use AI to create marketing and advertising copy.  The company saw click-through rates as high as 450% on ads using Persado AI vs. 50-200% for those crafted by people.  In another story, NASDAQ is testing AI to spot stock-market abuses.  It is testing an AI surveillance system to monitor its U.S. stock market and detect previously unknown methods of illegal equities trading, the Wall Street Journal reported.  And finally, I read Google had a major kidney breakthrough using DeepMind, which it acquired in 2014.  Its technology can predict if a patient has potentially fatal kidney injuries 48 hours before any symptoms can be recognized by doctors.  About 2 million people die every year from acute kidney injury, according to researchers from the University of Pittsburgh School of Medicine.  These are interesting new ways artificial intelligence is shaping the world.

Since this week’s article is longer than usual, I’ll keep my closing comments short.  UBS plans to levy a negative interest rate on wealthy clients who deposit more than $2 million with its Swiss bank, as lenders prepare for another round of lower interest rates.  While this won’t affect many, it is an interesting development about how banks treat deposits.  In a world of extraordinarily low interest rates, it seems banks no longer want your money.  While UBS isn’t an American bank, it does have operations around the world which includes branches in and around Cincinnati.  Let’s hope this idea doesn’t catch on.  Now you know.

August 2, 2019

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