20 June 2019

Will the Fed embrace the cut this???

The biggest concern in that meeting will be the direction of the interest rate
whether the Fed to hold or cut rate.
But the current lackluster economy figures show the sluggishness in the world
biggest economy.
In my point of view, by referring to the economic data that been published, there
are several reasons that the Fed will consider to embracing the cut;

1) The 1Q2019 GDP was driven by temporary boosters

- The US economy grew 3.2% in the first quarter. However, the growth was
temporary driven by net exports, higher inventories and highways
investment. According to Paul Ashworth, chief US economist, taking out the
temporary boosters which will all be reversed in the coming quarters, the growth
was only around 1%.

2) The US PMI index declined more than 2-points to 50.5 in May

- The declining PMI index to the lowest level in nearly 10 years was primarily
driven by poor client demand and the postponing order from the client since the
height of the US-China trade war. Many believes that the prolonged headwinds
will slowly hurt the manufacturing sector which will further drag on GDP. In
essence, reading above 50 indicates expansion in the sector, below 50 indicates
contraction.

3) US inflation remains mild

- The CPI declined to record 1.8%, slowing from April’s 1.9%. The muted
inflation was primarily driven by a decline in energy, fell 0.5%. In essence,
the Fed official target a 2% annual inflation rate. This could increase

1
 pressure on the Fed if the persistently low inflation will leave the Fed no
choice than to cut the interest rates this year.

Nevertheless, the latest job data show improvement, there are some concerns
that Fed Chair may not be as aggressive as the market had expected on rate
cuts.

4) Strong US job data in May

Nonfarm payrolls added 224,000 jobs in June vs 75,000 in May.

On balance, the Fed decision mainly dictated by economic figures amid the
escalation of the trade war with China and fading fiscal stimulus. More so, if
trade tension intensifies, the US economy will be losing more momentum.