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The Fed cut policy rates for the first time in over a decade and deemed the 25 basis point “insurance” cut as a preemptive measure to maintain economic performance.
The Federal Reserve lowered policy rates by 25 basis points in July, but we, along with most market participants, expect more rate cuts will be coming in light of the escalating trade tensions with China. Additionally, President Trump’s decision to apply more pressure to China through increased tariff proposals has spooked investors and led to a strong flight-to-quality trade in U.S. Treasuries. Overall, this “perfect storm” for the rates market has pushed yields below our year-end target for the time, but at this point we expect yields will revert back to our forecasted range.
Growth has been slowing, particularly from business investment, but consumer spending has kept the wind in the sails of the U.S. economy.
On a positive note, consumer spending has been quite strong with personal consumption rising to the highest level since 2017 at 4.3%. On balance, we expect stronger growth during the first half of the year to act as a buoy for weaker growth in the second half and therefore put GDP within our projected range of 2.00% to 2.50%.
Equity markets rose to all-time highs in July, but the fanfare was short-lived as new tariff threats from President Trump escalated trade tensions with China to a new level.
Milestones were made in July as the S&P 500 closed above 3,000 and the Dow Jones Industrial Average closed above 27,000 for the first time in history. The positive sentiment was drawn from a dovish stance from the Fed, economic data that held up better domestically rather than abroad, and a start to the corporate earnings season that was generally better than expected. Overall, there was a good stretch where trade tensions had simmered down, but investors were swiftly reminded how fast the tables can turn as tensions with China boiled over again.
While some Fed members were reluctant to cut rates against the current economic backdrop, it’s likely we will see further easing down the road.
What was vastly debated was how deep the cuts needed to be for the first cut in policy rates in over a decade. In order to “sustain” the current economic expansion the committee ultimately made the decision to cut rates by 25 basis points. While some Fed officials felt the action was inappropriate at this time as two members of the committee dissented in favor of no change in policy, we think cutting policy rates for the first time in over a decade was an appropriate decision in light of the increased downside risks and the desire to extend the current economic expansion.
The views expressed above reflect the views of Allianz Investment Management LLC, as of 08/2019. These views may change as market or other conditions change. This report is not intended and should not be used to provide financial advice and does not address or account for an individual's circumstances. Past performance does not guarantee future results and no forecast should be considered a guarantee either. Allianz Investment Management LLC is a registered investment advisor that is a wholly owned subsidiary of Allianz Life Insurance Company of North America. Allianz Life Insurance Company of New York is also a wholly owned subsidiary of Allianz Life Insurance Company of North America.