Interest rate cuts and cheap money no longer help if corporate profits collapse
A big confusion – thoughts after the FOMC protocol on recession and interest rPowell at his inaugurationate cuts
Yesterday Fed head Powell used the word “uncertainties” 26 times in his remarks describing future planned monetary policy activities. He clearly wanted to use this word to justify the high probability of an interest rate cut. Reacting to the available data and not to the order of the US president, who is on the way to imitate the Turkish president Erdogan, concerning central bank independence.
Recession ahead? The situation on the markets
The global economy has clouded over across the board. The central banks of the industrialized countries are responding by lowering interest rates and announcing the same. The Fed cannot remain idle. The argument of the rising US dollar is a powerful one that cannot be ignored.
The only problem for the Federal Reserve is communication. How do I make it clear to the markets that if index levels are at record levels, if unemployment is at the lowest level for 50 years – and this was confirmed on Friday with 224,000 new jobs created – and if inflation is close to the target range, interest rates must be cut? The Fed’s legal mandate has been fulfilled, namely to stabilise employment and stable prices in the USA. So how can we justify interest rate cuts here without panicking the markets in the sense of “what does the Fed know that we do not know yet”?
The Fed doesn’t know more. Yesterday Powell responded to a Congressman’s specific question about what to look for in the future, “indicators such as retail sales, new orders, inflation”, i.e. data that the entire financial world is looking at. Even the 400 economists, most of whom have a PhD, who work for the Fed, do not have a crystal ball.
The big question about the recession
Recently we have presented the dilemma in the markets. TINA or the interest rate leak…, the problem of exiting the stock markets when there is no recession. Now in a few days the reporting season starts and the market gets the economic data and the outlook that support or disprove the scenario of a recession. But it shouldn’t be that easy. As noted yesterday on CNBC, 66 percent of the S&P 500’s rise in the last half of the year was due to the following four stocks: Amazon, Facebook, Microsoft and Apple. As a direct reflection of this, the results of the remaining 496 stocks in the S&P do not play the decisive role. We have to keep an eye on…!
Our subjective conclusion
The coming reporting season will be very interesting in terms of the recession scenario. Interest rate cuts and cheap money will then be useless if corporate profits collapse. See 2000 and 2008.
But there is always one factor that needs to be pointed out. The US economy depends to a large extent on the consumption of its citizens. Industry accounts for only 20 percent of the US gross domestic product, with services and a small part of agriculture accounting for the lion’s share.
The US economy will then collapse when consumption and services begin to weaken – and with it Amazon, Facebook and Co. We therefore believe that the development of retail sales and consumer confidence will play a major role in the near future and that would put us back to the trade dispute. A further escalation of customs tariffs and the confidence of consumers in the future would be a thing of the past, keyword: How expensive will it get at Walmart?