The Dog Days Of August Are Upon Us

The die is cast. To defend the uneven expansion and ward off disinflationary forces, monetary authorities will provide more accommodation.  The Federal Reserve delivered its first rate cut in more than a decade and stopped unwinding its balance sheet two months earlier than it previously indicated (worth $100 billion of additional buying of Treasuries and Agencies). Following the end of the tariff truce, and after the July jobs report,the market was certain the Fed would cut rates again in September, according to Bloomberg and CME calculations).

The ECB has signaled its intention to ease policy in September. It is also thought to be considering several different tools, including a deeper negative deposit rate, renewed asset purchases, and perhaps, easier terms for the TLTRO that will be forthcoming at the start of Q4.

The BOJ has downgraded its growth forecasts and acknowledges that it will not meet its inflation target for at least the next two years. It is unlikely to move until the after October when the impact of the sales tax increase can be assessed.

The US has lifted the debt ceiling and suspending spending caps. US fiscal policy is less restrictive, and there is talk that the Trump Administration will support efforts to index capital gains. UK government spending to prepare for a no-deal exit will increase, but it may prove insufficient to offset the private sector investment paralysis.Germany, it would seem from the outside, has the need and resources to expand fiscal policy (and funding at negative yields), but it lacks the will. On the other hand, Italy has the will but lacks the means. Japan can provide a supplemental budget if the sales tax increase makes it necessary.

Data from the first half no longer matters in terms of policy and even July data will have little impact. Before the central banks meet again, they will have a sense of how August is faring. The coming weeks have all the makings of the summer doldrums.

However, Trump's declaration of new tariffs on China shifts the dynamics. Risks to world growth are greater. Interest rates will be lower for longer. The market may have been momentarily distracted by Powell's comments during the press conference about the trajectory of Fed policy. The new tariffs prompted investors to lock in a third cut this year and price in about a one-in-four or one-in-five chance of a fourth cut, which would be one in each of the remaining FOMC meetings. 

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Moon Kil Woong 2 years ago Contributor's comment

Some are claiming tariffs aren't causing inflation, however they are. It is isolated to what is being tariffed is why it hasn't appeared everywhere like normal inflation.

They are also hurting the supply chain and global sales. The US is not insulated anymore by the negative effects of the widening trade war not to mention Trump's new tiffs with Europe after seeing no one is interested in following him as he insults them.

David Reynolds 2 years ago Member's comment

Good argument.