As you know, we've been saying for some time that the economy is likely not as strong as some have hoped; the underlying data on economic growth has been tepid at best. This supports our view that interest rates are likely not to rise this year, and in fact, likely will fall. Our base case scenario is two interest rate cuts in 2019.
Interest rate cuts provide more liquidity for consumers and businesses as interest payment costs decrease. It also impacts the value of the dollar which helps export businesses when selling goods and services outside the United States. Of course, trade issues can outweigh a weaker dollar, but we believe those issues will be resolved.
We commonly watch economic data measures such as sentiment indices for businesses regarding their perspective on near-term future economic growth. A report released this week showed a dramatic drop in business sentiment. The article stated the following:
Morgan Stanley's Business Conditions Index, which captures turning points in the economy, fell by 32 points in June, to a level of 13 from a level of 45 in May. This drop is the largest one-month decline on record and the lowest level since December 2008 during the financial crisis, according to the firm.
"The decline shows a sharp deterioration in sentiment this month that was broad-based across sectors,' economist Ellen Zentner said in a note to clients. "Fundamental indicators point to a broad softening of activity, but analysts did not widely attribute the weakening to trade policy."
Source: June 13, 2019; CNBC.com article by Maggie Fitzgerald
Economic data is not necessarily tied to the price movement of assets such as equities or fixed income. But it is fair to say that there is a relationship between the two and, for that reason, we are watching economic data carefully. We have already invested on the assumption of slowing economic growth and we believe this is the right positioning given current information.
On another topic, this week at Stanford University I was the moderator of a forum held between the NanJing government and Silicon Valley leaders. I will have pictures and a few insights from the event in next week's update. I think you'll find it interesting.
If you have any questions, please let us know. Always here to help.