Pro Perspectives 7/31/19

July 31, 2019

We got the quarter point cut by the Fed today.  For those that have been looking for more, they also ended their balance sheet run-off two months early.  This means the bonds that mature, they will be reinvesting the proceeds (i.e. buying bonds — that halts the tightening of money via the Fed balance sheet). 

Remember, as we've discussed, the direction is more important than the magnitude at this point.  The Fed has just done an about face, from a tightening cycle, to easing.  The direction is now facing south, instead of north.  And it was the indiscriminate (tone-deaf) mechanical tightening by the Fed that represented a big risk in markets. 

Not only did it appear that the Fed might continue plodding along a pre-determined rate hiking path, at the expense of the economic recovery, but that monetary policy direction was sucking capital out of the emerging market world, and into the U.S. (dollar and dollar-denominated assets).    

With that, the biggest winners in this direction change by the Fed should be foreign currencies and emerging market stocks (and economies).

Trump now has his rate cut.  I suspect we'll see him 'claim a victory' on China negotiations (i.e. make a deal) very soon.  That puts global central banks in an easing direction, as the weight of a global trade war gets lifted.  Global markets and economies will boom.   


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