MCF Weekly Capital Market Review - September 23rd, 2019

There was surprisingly little news impacting financial markets last week. In a follow up to the drone strikes in Saudi Arabia, the Trump administration is pushing for increased sanctions on Iran. Secretary Pompeo visited Saudi Arabia last week to construct a coalition to deter Iran, who is believed to have supported the Houthi rebels that have claimed responsibility for the attack. Saudi Arabia made similar comments, choosing to present its case to the UN soon rather than launch a conventional war, for now.[1] The Middle East continues to be a volatile region and further escalation, or all-out war, could disrupt global oil production given the region’s importance to it.

The Fed moved as expected by lowering interest rates 25 basis points. Despite strong labor markets and positive US economic outlook, it cited global developments and muted inflation pressures as reasons for the cut.[2] These global developments are slowing global growth (especially outside the US) and an uncertain outcome of US trade disputes. The weakening in global growth data and heightened risks caused the Fed to proactively respond with a rate cut. Powell’s press conference relayed the message of responding to weakening global data, different from its “mid-cycle adjustment” stance last meeting. If the global data continue to show further slowdown, market participants can expect more rate cuts.

Both sides in the US-China trade war are still leaving the public in the dark. Chinese negotiators were in Washington D.C. last week but they left earlier than scheduled, opting to skip visits to farmlands in Montana and Nebraska.[3] The public has little information to go on but the fact that neither side is making combative public statements can be interpreted as progress rather than escalation. The next important deadline is October 15 when tariffs will be raised from 25% to 30% on $250 billion of Chinese goods.

Industrial production and the Fed business outlook survey were stronger than expected, a positive for a manufacturing sector that has recently struggled. Both housing starts and existing home sales were also stronger than expected.

This week will see releases on consumer confidence, GDP, durable goods orders, and personal income and outlays.

^[1]^{https://www.reuters.com/article/us-un-assembly-saudi/saudi-arabia-seeks-action-against-iran-after-oil-attack-allies-wary-idUSKBN1W70JD}

^{[2] https://www.federalreserve.gov/monetarypolicy/files/monetary20190918a1.pdf}

^[3]^{https://www.cnbc.com/2019/09/20/chinese-trade-negotiators-cancels-us-farm-visit-cuts-trip-short.html}

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