Stronger Than Expected Earnings, GDP Point to Three Fed Rate Cuts as S&P 500 Reaches New High

The fourth week of July 2019 was far less noisy than previous weeks, thanks largely to the muzzling of the Fed’s minions as they entered a communications blackout period in the week before they are set to reset short term interest rates onto a downward trajectory.

The following screenshot of the CME Group’s FedWatch Tool‘s estimated probabilities of various potential rate cuts being announced at the Fed’s upcoming Federal Open Market Committee meetings indicates that investors are now expecting just three quarter point rate cuts, with the first announced next week, the second before the end of 2019-Q3, and better than even odds of a third rate cut being announced in 2020-Q1.

In the welcome silence from Fed officials, investors focused instead upon stronger than expected earnings being reported during the week, and the better than expected GDP reported by the U.S. Bureau of Economic Analysis for the second quarter of 2019.

The combination of news kept investors focused on 2020-Q1 in setting stock prices, as they lifted the S&P 500 (Index: SPX) to a new record high closing value.

Here are the headlines that stood out to us during the week that was the fourth week of July 2019:

Monday, 22 July 2019

• Oil prices strengthen more than 1% on Iran risk
• Trump pick for Fed calls for sharp interest rate cut: report
• Trump, Congress leaders reach deal on debt limit, spending caps
• S&P 500 climbs toward record high, earnings in focus

Tuesday, 23 July 2019

• Oil rises near $64/bbl on second downed Iranian drone
• Earnings and trade optimism push Wall St. toward record high

Wednesday, 24 July 2019

• Oil falls 1% despite large U.S. stockpile decline
• Bigger trouble developing in China all over:

• Cracks in home building sector rattle Australia’s economy
• Japan July manufacturing contracts a third straight month though at slower pace: flash PMI
• French business activity cools unexpectedly in July: PMI
• IMF lowers global growth forecasts amid trade, Brexit uncertainties
• Exclusive: Bearing brunt of trade war, Singapore chipmakers cut jobs

Bigger stimulus developing in China all over:

• With finger on trigger, ECB aims at more stimulus
• South Korea second-quarter GDP bounces as public spending offsets private sector drag
• Brazil GDP to get 0.35 percentage point boost from worker fund stimulus

S&P 500, Nasdaq hit record highs; euro drops on soft data

• Surging chip stocks propel S&P 500 and Nasdaq to records

Thursday, 25 July 2019

• Oil climbs on Iran tensions, U.S. inventory decline
• Bigger trouble developing in China all over:

• Recession is spreading across German industry, Ifo economist says
• Global economic growth rut at risk of deepening despite rate cuts: Reuters polls
• Asian firms cut capex, weakening outlook for demand and jobs

Bigger stimulus developing in China all over:

• ECB opens door to rate cuts, more QE, tiering
• European shares sink as Draghi disappoints rate-cut bulls

Wall Street gives up record high following weak results, Draghi

Friday, 26 July 2019

• Oil gains on U.S. economic data, Gulf crude tanker dispute
• Bigger trouble developing in China all over:

• Singapore factory output at near four-year low as electronics take a hit
• China gives big distressed debt managers nod to make M&A plans for troubled smaller banks: sources
• Mexico’s economy seen posting 0% growth in second quarter
• U.S. second quarter GDP growth slows to 2.1% but tops estimates

Bigger stimulus developing in China all over:

• Indonesia central bank reiterates room for accommodative policy as inflation seen low
• China Shandong province to spend $145 billion by year-end to speed key projects

Alphabet, Starbucks drive Wall Street to record high

Elsewhere, Barry Ritholtz found the negatives outweighed the positives in the week’s news flow, identifying 6 positives and 8 negatives.

This upcoming week will hopefully be mostly quiet, but once we get past the FOMC’s end-of-July meeting, we expect the news will return to higher noise levels. How that might affect how far forward in time investors cast their attention remains to be seen.