By Glenford S. Robinson
Could the US economy be on the verge of an all-out economic collapse? Well, the urgency with which the Federal Reserve Chairman Jerome Powell has acted says exactly that. The Chairman hinted on Friday that the central bank would continue its rate cutting plans started last month (rate cut of 25-basis points). With US Manufacturing Purchasing Managers Index (PMI) and New Home Sales numbers coming in below forecasts, the Chairman has good reason to hint at continuing rate cuts. This approach would be well justified. Lower than expected PMI numbers often predicts low GDP numbers, 85% of the time. A decline in New Home Sales data, coupled with a decline in jobless claims, tells a tail of consumer reluctance to spend their hard-earned cash by assuming greater financial responsibility on purchasing new homes, with mortgages that could be difficult to pay for, during an anticipated economic downturn or recession. So, these consumers are holding on to their cash for now, until they can determine a positive outlook for the economy.
The PMI measures factory activities in the United States. Therefore, a decrease in PMI numbers signals that contraction has occurred during the period measured. In this case, a reduction in manufacturing activity has occurred in the month of August. This hasn’t happened in a decade. So, there could be a cause for concern. The Federal Reserve Chairman, Jerome Powell, is definitely concerned. This is the reason why he has signaled that his agency is prepared to use any monetary policy tool available to thwart an economic slow-down.
Manufacturers may’ve put-on the breaks on production as a result of the ongoing US-China trade war, anticipating that there could be a reduction in demand for their products in the near future. In addition, consumers may have put-on the breaks in spending, stuffing their pillows with dollar bills thereby keeping them out of the economy because they are uneasy about the current direction of the economy and is bracing for the worse.
What goes up, usually comes crashing down at some point, a metaphor positively correlated with the upward trajectory of the US economy over the past few years starting from the end of the stock market crash period in 2008. The economy has been in an expansion phase for quite a while now, and could be showing signs of possibly contracting. The recent sighting of a few Flip flopping—back and forth yield curve doesn’t make the economic outlook any better either.
Fed warnings about risk of escalating trade tensions and the limited ability of the central bank to absorb any fallout was the theme of the Jackson Hole, Wyoming meeting. Mr. Powell, warned that Federal Reserve monetary tools weren’t adequate enough to eliminate increasing business and investor anxieties over the escalating trade war between the US and China.
On Friday markets languished ahead of the Federal Reserve Chairman, Mr. Jerome Powell’s speech as a result of new tariff imposed by China on $75 billion worth of U.S. goods in retaliation of tariff imposed on the second largest economy in the world by Mr. Trump. Markets recovered after the Fed Chair’s speech, but fell sharply again after President Trump fired off another round of war-like tweets, a clear sign of economic uncertainty displayed by investors hanging on every word uttered by the Fed Chair. This is what we call high market volatility, investors run to the hills and then run back down in quick succession—can’t seem to make up their minds.
Mr. Trump fired off another round of cantankerous tweets on Twitter slamming China and calling on U.S. businesses to prepare for new, unspecified countermeasures against Beijing, and showing his ongoing displeasure with the Federal Reserve’s and his buddy Jay Powell’s handling of monetary policies of not cutting interest rates fast enough and blaming them for raising rates too rapidly, months ago.
The US dollar still continues to batter rival currencies despite the recent 25-basis points interest rate cut implemented by the Feds 3 weeks ago; consequently, Mr. Trump has turned up the heat on rival nations accusing them of devaluing their currencies at the detriment of the US dollar and has implied that the Feds aren’t doing enough to combat such mischievous actions by other nations, such as China, Europe, and others.
Gold rose 2% on Friday after Powell’s speech hinted to investors that the Federal Reserve would possibly cut interest rate further. The USD dropped in value moments after the speech, sending the price of gold to 1,527.20 an ounce after it had pulled back a little after hitting a six-year high of $1,534.31. So, not only is the stock market receding, the US dollar is also getting a little weaker at least in the past week. The Euro pushed upward from around the 1.1065-70 area to well over the 1.1141 price zone and looks as if it might continue its upward momentum. How long will this upward trend by EUR/USD last? No one knows exactly. Caution should be exercised because there is till a high degree of volatility in the financial markets that is both the equities market and the currency market. It is not exactly clear yet, how bitcoin will react to this level of volatility in these two markets. Bitcoin has a tendency to get stronger as the US dollar gets weaker, correlating with gold as the new safe-haven asset class.
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Mr. Glenford S. Robinson is the Chief Executive Officer and Founder of Mstardom Finance. He is the editor-in-chief of News and Magazine article publishing. Mr. Robinson is also the lead developer of the Mstardom Finance Platform at Mstardom.com. He is passionate about quantitative finance and technologies associated with that discipline, such as python-based algorithmic programing. Mr. Robinson is also a Clinical Laboratory Scientist currently practicing laboratory medicine. When Mr. Robinson is not practicing laboratory medicine, writing articles, or studying finance, he is creating mathematical and statistical modules, using quantitative approaches to identify trading opportunities in the Forex and Stock Market.