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We expect the Federal Reserve to cut rates this week by 0.25% — the first cut since 2007. Last week, the European Central Bank signaled a willingness to cut rates and buy assets. Both banks are responding to signs of slower global growth and weakening trade. These actions would mark a turnaround in messaging from a year ago. At that time, most were expecting global rates to move higher as growth kept on an upward path.

A Fine Line

The central banks must walk a fine line between voicing a worrying message about growth and providing “insurance” against a potential future downturn. The difficulty here comes from conflicting data. Most of the data we’ve seen lately tends to support the idea that growth continues, albeit at a more modest pace. Employment and market-based indicators point to growth and tightening capacity, on the one hand. Manufacturing and trade data suggests some weakness on the other. The data, taken as a whole, still seems to be leaning in the direction of continued growth.

Take last week’s U.S. Gross Domestic Product figures, for example. In the second quarter, the U.S. economy grew at an annualized rate of 2.1%. The first half growth rate now stands near 2.6%, above our 2.5% full-year expectation.

Within the report, we saw good strength in consumption, which grew at a 4.3% annualized pace. Business investment was a headwind; however, as non-residential fixed investment fell at a 0.6% annualized pace. The year-over-year growth in business spending has slowed to 2.7% through the second quarter versus 6.9% about a year ago (chart, below). Investment in inventory rose, which could weigh on growth in the second half of the year. A purer measure of domestic demand, called “final sales to domestic purchasers”, was also steady — that measure expanded by 2.3%, which is consistent with constant, ongoing growth. All-in-all, we see the report as a solid one.

Next Week

Next week we expect to have an update to our WCA Fundamental Conditions Barometer. The overall tone of data has been better than at the start of the year, but far from robust. This week we will get data on industrial production in Japan and the latest spending data in the United States. These data points will round out our observation set that goes into the near-term forecast of our barometer.

Kevin Caron, CFA, Senior Portfolio Manager
Chad Morganlander, Senior Portfolio Manager
Matthew Battipaglia, Portfolio Manager
Steve Lerit, CFA, Client Portfolio Manager
Suzanne Ashley, Analyst

(973) 549-4168

www.washingtoncrossingadvisors.com
www.stifel.com

 


Disclosures

WCA Fundamental Conditions Barometer Description: We regularly assess changes in fundamental conditions to help guide near-term asset allocation decisions. The analysis incorporates approximately 30 forward-looking indicators in categories ranging from Credit and Capital Markets to U.S. Economic Conditions and Foreign Conditions. From each category of data, we create three diffusion-style sub-indices that measure the trends in the underlying data. Sustained improvement that is spread across a wide variety of observations will produce index readings above 50 (potentially favoring stocks), while readings below 50 would indicate potential deterioration (potentially favoring bonds). The WCA Fundamental Conditions Index combines the three underlying categories into a single summary measure. This measure can be thought of as a “barometer” for changes in fundamental conditions.

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