As the mercury rises in the barometers of economic and political hallways, pressure builds across the globe. The rhetoric from policymakers at the beginning of the year has begun to wane and with it, sentiment has dropped. Investors and markets alike need to see significant improvement from a series of geopolitical concerns, which intensified last week.
We begin with the most erratic pressure point, President Trump. The escalating trade tensions between China and the US arguably worsened, with Trump admitting the ball currently sits in his side of the court. Trump wants to see further concessions from China, he also wants President Xi to arrange to meet with him at the G20 summit next week. If not, then he has threatened to impose tariffs of 25% or much higher.
China’s woes do not end there. Tensions in Hong Kong overflowed, and government offices were forced to close due to the ferocity of the clashes between the police and protestors, over the proposed extradition law. The timing could not have been worse, as Hong Kong’s economy has slowed to a pace not seen since the Global Financial Crisis.
Pressure continues to be added with the attacks on oil tankers in the Gulf of Oman, with suspicion and growing evidence of Iran’s involvement. The unknown element is what will be the response? Response is key to all these pressure points, particularly when it comes to the health of the US economy.
Consumer prices in the US, a key measure of inflation for the Federal Reserve, was broadly flat for May, increasing pressure on the Federal Reserve to cut interest rates. Their next meeting to discuss monetary policy is this week, and with pressure building in the form of data reports and political tweeting, the odds of a rate cut are swelling. We think the Federal Open Market Committee will want to assess the employment data for June, to verify the slowdown in the US labour market before pulling the trigger. That would mean an interest rate cut being announced next month, which when can you consider 12 months ago we were looking at a continuing of tightening in monetary policy, sentiment has swung around completely.
It is worth adding that it is extremely rare for the US central bank to adjust interest rates during a Presidential Election year, so Jerome Powell has just six months to get interest rates to a level that he deems appropriate.
Different protagonists under pressure. Which of these will be resolved during the summer? The markets are looking for another measure of goodwill from the policymakers and hoping the politicians can avoid making matters worse. A nice break from the homegrown issues we currently have in the UK.
Content courtesy of Beaufort Investment Management