Rallying back over 700 points in the last two sessions, the Dow Jones Industrial Average ended today’s trading session at 25,539, still off about 1,000 points from its record high in October 3, 2018. When Federal Reserve Board Chairman Jerome Powell met with his Open Market Committee [FOMC] May 1, he left the federal funds rate unchanged, signaling to traders that the U.S. economy was slowing down. Wall Street went into a buying frenzy over the last two sessions guessing that Powell had seen enough to cut rates when the FOMC meets again June 18. Unlike Main Street, Wall Street buys on rumors, sells on news, rumors now about an impending Fed rate cut. With the yield curve inverting or flattening, Powell reads recession on the horizon prompting him to loosen monetary policy. Only partisan politicians believe the U.S. economy continues to show strength.
When Wall Street rallies on bad economic news, there’s a disconnect with the underlying economy. You’d think that Wall Street would sell off when it gets bad economic news but the opposite takes place. Looking beyond 72-year-old President Donald Trump’s trade war with China or Mexico, Wall Street looks fixated on the next FOMC meeting, betting that Powell cuts the federal funds rate. If Powell cuts, you can bet the Fed sees recession getting close, hoping for a soft landing. Cutting rates usually has a stimulus effect on the economy, hoping to keep the business cycle moving ahead. ADP’s National Employment Report shows hiring slowing-to-a-crawl with private employers hiring at the slowest rate in nine years. Some analysts see the trade wars as taking its toll on the U.S. economy, urging Trump to resolve the issue with China at the G20 meeting June 28 in Osaka, Japan.
Whether or not Trump can resolve the China trade war on the sidelines of the upcoming G20 is anyone’s guess. China has shown no signs of cracking under U.S. pressure to sign a trade deal. But slowed economic activity in Europe and Asia also portends a global economic slowdown, less related to Trump’s spats with China and Mexico. When Trump meets with Chinese President Xi Jinping June 28 on the sidelines of the G20, he’d better resolve the trade war or face more market volatility. Enough market volatility could cause more economic hardship in the U.S. and elsewhere. “Today and yesterday the market was embracing the idea of more weakness in the economy giving the Fed some cover to preemptively cut rates. If the excuse evaporates with a strong jobs number Friday, the market might be disappointed,” said Jeffrey Kleintop, Schwab’s Boston-based Global Investment strategist.
Trump’s reelection bid hinges on strong economic growth, prompting him to resolve the China trade war when he meets with Xi in Osaka June 28. With the economy already slowing, Trump needs the economy firing on all cylinders, not sputtering from Chinese and Mexican tariffs. Trump said he hopes to reach a deal with Mexico to avoid slapping the U.S.’s biggest trading partner with tariffs. Cutting a Mexico deal “would alleviate on of the risks that lurks out there,” said Mark Luschini, a market strategist at Philadelphia-based Janey Montgomery Scott. Announcing 5% tariffs on Mexico June 10 would trigger more Wall Street selling, no matter what the Fed does with interest rates. Using tariffs to resolve the Central American refugee crisis at the Mexican border makes no sense. While everyone wants a secure southern border, most American don’t want another trade war with Mexico.
Reading the tea-leaves, it looks like the U.S. economy has stagnated, no longer promising strong Gross Domestic Product [GDP] growth. If Friday’s Labor Department report for payrolls prove anemic, it could trigger a rate cut at the FOMC’s next meeting. Powell has left himself very few tools, other than slashing interest rates, to deal with a slowing economy. “You’d want to see materials, energy, industrials and financials leading the rally,” said Luschiani. “I’d be reluctant to chase this because it might just be a snapback rebound,” said Luschiani. Flirting with disaster, Trump must think twice before escalating a trade war with Mexico. Looking at the Fed’s actions, it’s clear that Fed governors see an economic slowdown or recession first, before cutting the federal funds rate for the first time in two years. Today’s rally mode could be short-lived if Trump can’t figure out how to end the trade wars.
Rallying on bad economic news, the U.S. economy can’t take more tariffs from Mexico or China. No one wants to see the U.S. sink into recession this year-or-next because of unnecessary trade wars. When the Labor Department reports on jobs Friday, Powell will no doubt take that into consideration when responding to future economic trends. Whether or not Trump can pull the economy back from a slowdown is anyone’s guess. Trump can’t make up his mind what to do with Mexico. If he listens to his closest economic advisers at the White House or on Capitol Hill, Trump would refrain from applying sanctions on Mexico. Given the global economic slowdown, it was only a matter of time before the U..S. was hit with slow growth. If Trump wants to help the U.S. and global economy, he’d refrain from more tariffs.
