Federal Reserve Chairman Jerome Powell said Wednesday that “the economic outlook hasn’t improved in recent weeks, a strong signal the central bank could cut its benchmark short-term interest rate when officials meet later this month,” The Wall Street Journal reports.
Many factors contribute to the economic outlook, including trade, inflation, and the strength of the global economy. At this point, the Fed is faced with conflicting data. On one hand, consumer spending and labor markets have been healthy. On the other hand, “growth in business investment has ‘slowed notably’, [Powell] said, possibly reflecting worries about trade,” reports the Journal.
Inflation is another key data point the Fed considers when making its decisions on interest rates. Last year, the Fed hiked rates in hopes of raising price pressures to the typical 2% target. “Rather than holding at its 2% target, inflation has softened this year. Core inflation, which excludes volatile food and energy(NYSEARCA:XLE) prices, was up 1.6% from a year earlier in May, down from 2% in December, according to the Fed’s preferred gauge,” says the Journal.
Investors, expecting a cut in the benchmark rate by a quarter of a percentage point at the July 30-31 meeting, sent the S&P higher this morning. The rate is currently between 2.25% and 2.5%.
Once the Fed releases its minutes from the last policy meeting, we will have more insight into how the central bank’s thinking shifted after President Trump’s recent threat to impose tariffs on Mexico, reports Reuters. At the last policy meeting in mid-June, only eight of the 17 policymakers saw the need for a rate cut by the end of this year. When the meeting minutes are released later today, we will know whether that sentiment has grown.
According to the CME Group’s Fed Watch Tool, traders are pricing in a 100% probability of a rate cut before the end of July, says CNBC. At this point, the case for lowering rates isn’t clear-cut. The Fed isn’t responding to a downturn—rather, it is extending a lengthy bull run, says Reuters. The Fed is closely watching moves on tariffs, as it believes tariffs have been materially affecting global economic growth in the past year.
Sectors: The average momentum score for the Sector Benchmark ETFs increased from 18.00 to 19.91. Momentum increased for eight of the 11 sectors last week. Real Estate(NYSEARCA:IYR) led the pack with a 10-point increase in momentum score. Technology remained the top-ranked sector with a 1-point increase in momentum score. Energy remained the laggard despite a 1-point increase in momentum score.
Factors: Among the Factor Benchmark ETFs, the average factor score increased from 19.58 to 21.17. Momentum increased in 10 of the 12 factors last week. Small Size remained neutral for the week, keeping it in last place. Momentum, Low Volatility, and Quality remained the top three factors.
Global: The average Global Benchmark ETF momentum score decreased from 18.27 to 15.82 for the week. Momentum in the global sector decreased in eight of the 11 regions last week. With a 10-point jump, Latin America had the largest increase in momentum score, which helped it overtake Pacific ex-Japan for the top spot. China’s 12-point decrease in momentum score, the biggest loss of the week, caused that sector to fall to last place.