7 Oct

Will Interest Rate Cuts Be Enough to Lift the US Economy?

WRITTEN BY Vineet Kulkarni

While there might be another interest rate cut in October, some people think that it might not be warranted. Esther George, the Kansas City Federal Reserve Bank president, said that low inflation in the US is mainly due to global forces. As a result, monetary policy can’t do much about the low inflation, as Reuters reported on Monday. George, who opposed the interest rate cuts in July and September, thinks that the US economy is on strong footing.

More interest rate cuts in October?

The Fed delivered a 25-basis point interest rate cut in September. The Fed’s stance for upcoming interest rates will be clear when it releases the September meeting minutes on Wednesday. Policymakers seem to be divided about future interest rates.

According to the CME FedWatch tool, traders expect an 84% probability of another quarter-point rate cut in the meeting on October 30. The Fed has set the current target range of rates at 1.75%–2.00%.

Weak economic data continue to pour in

Trade uncertainties have taken a toll on the US economy. Last week, the ISM published the US manufacturing PMI data for September. The US PMI fell to 47.8 in September, which was below analysts’ expectations. The surprise contraction stoked recession fears.

To add to the woes, the Bureau of Labor Statistics released non-farm payroll data last week. The data were lower than the expectations. The non-farm payroll increased by 136,000 in September, while the revised non-farm payroll number was around 168,000. While the job additions remained strong, the slowdown could be concerning.

The unemployment rate fell from 3.7% to 3.5% last month. September’s unemployment rate was the lowest since December 1969.

According to The Washington Post on Monday, the National Association for Business Economics survey expects a significant slowdown. The survey estimates that the US GDP growth will slow down to 2.3% in 2019 from 2.9% last year and 1.8% in 2020. The trade conflict will likely be the main driver hampering the growth.

Poor earnings growth in the third quarter

Poor corporate earnings growth in the third quarter could be a negative indicator.

According to a FactSet Research report, 113 companies from the S&P 500 have given their third-quarter earnings guidance. Among the companies, 82 gave a negative EPS guidance for the third quarter, which is above the five-year average of 74. Among the 82 companies, the main contributors are from the IT and healthcare sectors.

Apart from the third-quarter earnings growth, management’s commentary for the fourth quarter and 2020 will likely set up stock markets’ path ahead. Lower interest rates could reduce companies’ debt servicing costs and boost their profits.

Trade uncertainty had a negative impact on companies like Apple (AAPL). So far, the stock has risen approximately 45% this year. Analysts expect Apple’s earnings to fall approximately 10% YoY in the fourth quarter. The company is scheduled to report its quarterly earnings on October 30.

Boeing (BA) had a large impact on the trade war with China. So far, the stock has risen about 16% this year. Based on the estimates, Boeing’s net income will likely fall almost 37% in the third quarter compared to the third quarter of 2018. The company will likely report its earnings on October 23. To learn more, read Boeing to Miss Aircraft Delivery Aim by 50% on MAX Woes.

Will an interest rate cut lift the markets?

Historically, October is usually a relatively volatile month for the markets. Last week, broader markets started weak due to poor economic data. The S&P 500 (SPY) fell 0.4% last week. Interestingly, SPY has gained 18% this year. The Dow Jones Industrial Average (DIA) fell 0.8% last week, while it has risen more than 14% YTD. The Invesco (QQQ) Trust has risen more than 23% during the same period.

President Trump has criticized Jerome Powell for his less-accommodative rate cuts. Recently, President Trump demanded that the Fed cut the rates to zero or even below. Due to recent recession signals and other weak economic data, President Trump might continue to pressure the Fed for larger cuts to boost the economy. Will interest rate cuts be enough to revive the economy?

Read Reelection Prospects: Should Trump Be Concerned? to learn more.

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