Last Wednesday, the central bank raised the benchmark interest rate by a quarter of a percentage point to a range of 1.75 percent to 2 percent. The much-expected rate hike and announcement also included information suggesting Fed governors are more inclined to raise rates two more times this year. Markets reflected the news as federal funds futures went from a 50 percent to 58 percent likelihood of two more rate hikes before year’s end.
If both increases are implemented, they would push interest rates up to a range of 2.25 percent to 2.5 percent. One more rate hike has been fully priced into the market for quite some time; however, two increases have not been. The accompanying chart shows the two-year Treasury yield, which indicates interest rate hikes push rates higher.
Source: www.Bloomberg.com June 2018
Earlier this month, the Federal Reserve Bank of New York released their most recent United States recession probability chart. We have referenced this chart several times over the past year and highlight that the risk of a recession beginning within the next 12 months, or by May 2019, sits at 11.1182%. This is a decrease from last month’s probability of 11.2105%. We are currently experiencing one of the longest, and soon to be longest, economic expansions in U.S. history. We believe a recession will occur at some point, but the next 12 months appear to be positive for the U.S. economy.
Last week also opened with heightened trade tensions between the United States and its allies. It closed with the United States imposing new tariffs on $50 billion of Chinese goods. The Chinese declared it was the start of a trade war, reported Financial Times.
U.S. markets largely ignored the potential impact of trade wars on multiple fronts. Barron’s reported the Dow Jones Industrial Average, which includes companies that are vulnerable to tariffs, moved slightly lower. However, the Standard & Poor’s 500 Index shrugged off the possibility of trade wars, and the NASDAQ Composite gained more than 1 percent.
While Barron’s has written the largest risk to the U.S. stock market is the possibility of global trade wars, it appears many investors believe tariffs are a negotiating tactic. Barron’s reported:
“The market’s apparent indifference suggests it doesn’t see these tariffs as the reincarnation of Smoot-Hawley, but just the latest in President Trump’s negotiating tactics. Moving away from his denunciation of Kim Jong-un as “Little Rocket Man” inviting “fire and fury” by missile launches, Trump last week declared the threat from North Korea neutralized. Similarly, many professional investors view the bluster on tariffs as part of Trump’s negotiating tactics, rather than the start of an actual trade war.”
News that monetary policy is becoming less accommodating in certain regions of the world didn’t have much impact on markets either. Reuters reported the Federal Reserve raised its benchmark rate 0.25 percent last week. The European Central Bank is ending its bond-buying program and gave notice it expects to begin raising rates next summer. The Bank of Japan is still easing.
There was a lot of red ink in Asian emerging markets. China’s Shanghai Composite finished the week lower, as well. However, stock markets in Canada and Mexico finished the week higher.
Key points for the week
- Fed raises rates and signals more to come.
- AT&T-Time Warner merger is approved, indicating a flexible approach by the courts.
- Trade concerns continue to increase.
If you’ve been watching the World Cup – the global soccer championship – you’ve probably seen the commercials entreating Americans to root for another country since we don’t have a team playing. The ads offer encouragements like, “Iceland could really use your support. We don’t have enough people to do the wave,” and “Cheer for Germany. We gave you the frankfurter!”
If you haven’t already chosen a favorite team, you may want to consider (or not) the insight of economists before making your choice. Since the demise of Paul, the octopus that successfully predicted winners during the 2010 final, various firms’ economists have offered opinions about this year’s possible winner. Financial Times reported:
- Multinational analysts at a Japanese bank concluded “…using portfolio theory and the efficient-markets hypothesis as well as data on the value, form, and historical performance of players, that France will beat Spain in the final, with Brazil in third place.”
- A German bank predicted Germany will win, and so did a Swiss bank that relied on unspecified econometric tools to determine that Germans have a 24 percent chance of victory.
- A Dutch bank concluded Spain will be the big winner.
Perhaps the most interesting analysis was done by the Toulouse School of Economics, which employed automated face-reading software on World Cup sticker albums from the 1970s through the present. They found teams that did better in the group stage had players who looked happier or angrier on the stickers. Happiness showed confidence and anger led to fewer goals allowed.
WHAT ARE WE READING?
Below are some articles we paid particularly close attention to this week. We encourage our readers to follow the links.
A year after an assassination attempt against the U.S. House GOP baseball team left him badly wounded, Congressman Steve Scalise returned to this year’s game against the House Democrats and successfully threw out the lead-off batter at first base. Never had both teams been happier for an out to be recorded in a game.
The Tax Cuts and Jobs Act has doubled the amount of the child tax credit. This credit is different than the child/dependent care credit, which is for childcare expenses. The child tax credit has been doubled to $2,000 per child for tax years 2018 through 2025. A more important change is the increase income limits to qualify for the child tax credit, which means many more taxpayers will qualify for the child tax credit beginning in 2018.
"We followed our dreams, for dreams were all we had. In the process our lives became magical."
~ Sigfried & Roy, Entertainers
"The important thing is not to stop questioning."
~ Albert Einstein
"The majority of men meet with failure because of their lack of persistence in creating new plans to take the place of those which fail."
~ Napoleon Hill,1883-1970, Author
“Winning is great, sure, but if you are really going to do something in life, the secret is learning how to lose. Nobody goes undefeated all the time. If you can pick up after a crushing defeat, and go on to win again, you are going to be a champion someday.”
~ Wilma Rudolph, American sprinter and Olympic champion
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