Key Takeaways
- Global PMI surveys top expectations
- Market rally broadens
- September Fed cut looks likely
On this week’s edition of Market Week in Review, Director and Senior Portfolio Manager Alex Cousley explained what the latest data suggests about the health of the global economy. He also unpacked recent stock-market performance and discussed the likelihood of a U.S. Federal Reserve (Fed) rate cut next month.
Growth Divide
Cousley began with a look at preliminary PMI (purchasing managers’ index) data from key economic regions around the globe. The numbers from the U.S., UK, eurozone and Japan were generally better than expected. “This suggests much of the global economy is still in decent shape despite some headwinds from tariffs,” he said.
China’s economy, however, continues to struggle, Cousley noted. He said recently released data on retail sales, industrial output and fixed-asset investment all fell short of consensus expectations. Retail sales in particular were disappointing, showing Chinese consumers are still cautious on spending, Cousley noted.
The Chinese government has unveiled some new policies to boost spending, including consumer loan subsidies, but Cousley said he expects the impacts of these to be minor. “Overall, we still think growth in China is likely to stay below average over the next 12 months,” he stated.
Rally Widens
Shifting to the stock market, Cousley said the rally has started to broaden beyond mega-cap tech stocks in the past week. As proof, he noted the median S&P 500 company recently outperformed the market-cap-weighted S&P 500 Index, while the Russell 2000 Index of small-cap stocks bested the Russell 1000 Index of large-cap stocks.
“I think there’s still more room for this to run in the weeks ahead,” Cousley remarked.
September Shift
Turning to the Fed, Cousley noted all eyes are on Jackson Hole, Wyoming, where the central bank’s annual meeting concludes Saturday. While Chair Jerome Powell is unlikely to address specifics about a potential rate cut in September, Cousley said he expects the Fed to begin lowering borrowing costs next month.
Why? “The U.S. economy is still holding up, but it’s cooling off. July’s employment report is a clear sign of this,” he explained. In addition, the Fed’s current monetary policy is restrictive, designed to slow the economy, Cousley said.
With this in mind, September seems like the appropriate time for the central bank to restart the rate-cutting cycle, he remarked. “Ultimately, over the next 12 months, the Fed is likely to gradually bring rates down to a more neutral level, which we estimate is around 3.25%,” Cousley concluded.