- FOMC minutes signal unchanged rates for “some time”
- White House floats idea of extending tech war to Chinese surveillance companies
- Today’s expected drubbing of Conservatives in the EU Parliamentary elections will be the next blow for PM May
- U.S. new home sales expected to dip but remain strong
FOMC minutes signal unchanged rates for “some time” — Yesterday’s minutes from the FOMC meeting on April 30/May 1 signaled that the Fed does not anticipate changing its funds rate target for “some time.” Specifically, the minutes said, “Members observed that a patient approach to determining future adjustments to the target range for the federal funds rate would likely remain appropriate for some time, especially in an environment of moderate economic growth and muted inflation pressures, even if global economic and financial conditions continued to improve.”
The minutes also suggested that there will be no consideration of a rate cut due to the recent dip in inflation since, “Many participants viewed the recent dip in PCE inflation as likely to be transitory.” That was in line with Fed Chair Powell’s recent comments on inflation in which he said the recent weakness in the inflation statistics was mostly due to transitory factors.
There was no mention in the minutes of any discussion about an easing move. To the contrary, the Fed dots currently anticipate rates being unchanged this year and that the funds rate will need to be raised by +25 bp in 2020, which is much different than market expectations for nearly two full rate cuts by the end of 2020.
While the FOMC minutes had nothing to suggest that the Fed is thinking about an easing move, the situation has deteriorated since that meeting. US/Chinese trade relations essentially collapsed just a few days later when President Trump on May 6 announced plans to hike the tariff to 25% from 10% on $200 billion of Chinese goods. That caused the current downward correction in the stock market.
The recent US/Chinese trade deterioration and stock market sell-off are probably not severe enough to force the Fed to start thinking about an easing move. However, the Fed may in fact start getting worried if President Trump goes through with his threat to slap a 25% tariff on another $300 billion of Chinese goods and China retaliates, which would take a bite out of both the U.S. and Chinese economies. The Fed would also get more concerned if there is a further drop in the stock market of 5% or more.
White House floats idea of extending tech war to Chinese surveillance companies — There were various media reports yesterday that the Trump administration is considering a trade-blacklist of five top Chinese surveillance companies under the pretext that their equipment is being used to oppress the Uighur minority in western China. Coming on the heels of last week’s blacklisting of Huawei, the Trump administration seems to have a growing appetite for blacklisting Chinese tech companies.
The question is whether the blacklisting is being done for leverage in the trade negotiations or whether it is a goal in itself to slow down China’s growing dominance in some areas of tech hardware. One factor supporting the idea that the tech attack is a goal in itself is that there was a report on Tuesday that the Trump administration had been planning the Huawei attack for months and had planned to wait until after a trade agreement had been reached. However, the Trump administration then decided to go ahead with the move on Huawei when the trade talks fell apart.
There is a similar question as to whether tariffs are only being used as leverage to negotiate a trade agreement or whether they are an end in themselves to curb Chinese exports and its economy. A factor supporting the idea that the tariffs are an end in themselves is that the Trump administration has so far insisted that at least some tariffs will remain in effect even after there is a trade agreement.
The combined tariff/tech pressure undoubtedly looks to China as a holistic strategy to curb its growth and influence. If that is the case, then China is less likely to compromise and more likely to simply absorb the blows and wait for the end of the Trump presidency. In that case, the markets could have to endure at least another 1-1/2 years of mounting US/Chinese strife.
Today’s expected drubbing of Conservatives in the EU Parliamentary elections will be the next blow for PM May — Conservatives are expecting a dismal showing in today’s UK election for representatives to send to the EU Parliament. Today’s election should not even be happening since the UK was due to be out of the EU by now. Conservative Party MPs are happy to train their fire on Prime Minister May for the Conservative Party’s quick political descent in the polls, although the Party itself is to blame in the sense that it is hopelessly split and can’t agree among themselves about how to execute an exit from the EU.
In any case, Prime Minister May will be shown the door shortly after the early-June vote on Brexit, if not sooner, thus paving the way for a new Prime Minister. There are reports of a Cabinet revolt that could push Ms. May out as soon as this week. However, the new PM is not likely to have much more luck than Ms. May in getting a Brexit deal through Parliament, which means that the odds are rising for an eventual no-deal Brexit.
U.S. new home sales expected to dip but remain strong — The market consensus is for today’s April new home sales report to show a decline of -2.5% to 675,000, giving back about half of March’s +4.5% increase to 692,000. New home sales are in strong shape at only 2.8% below the 11-year high of 712,000 units posted in Nov 2017. Home sales have recently improved thanks to this year’s sharp decline in mortgage rates. The 30-year mortgage rate is currently at a 1-1/4 year low of 4.07% and has plunged by -87 bp from last November’s 8-year high of 4.94%.
