What did the Fed’s July meeting minutes reveal?

On the latest edition of Market Week in Review, Senior Investment Strategy Analyst Alex Cousley and Julie Zhang, director, North America sales enablement, discussed the recently released minutes from the U.S. Federal Reserve (the Fed)’s July meeting. They also chatted about key risks for markets in the short-term as well as trends in global supply chains amid the coronavirus pandemic.

Fed minutes indicate skepticism toward yield-curve control

On Aug. 19, the Fed released minutes from its July policy meeting, which showed a lowering in its growth forecast for the remainder of 2020, Cousley said. “While the resurgence of the coronavirus in the U.S. during July did lead to a downgrade in estimated GDP (gross domestic product) growth, it’s important to realize that the Fed has been extremely accommodative ever since the pandemic began. We expect that this whatever-it-takes approach to helping the U.S. economy recover will continue unabated,” he stated.

The Fed minutes also showed that officials are close to finalizing a review of the central bank’s policy strategy, which could include a shift toward average inflation targeting in order to make up for past inflation misses. Under this strategy, the Fed would allow inflation to run above-target for longer periods of time, Cousley explained.

The minutes also indicated that the central bank is skeptical about implementing the idea of yield-curve control—wherein the Fed would cap interest rates at a certain point on the U.S. Treasury yield curve through bond purchases. According to Cousley, key reasons for the Fed’s skepticism are economic uncertainty and the fact that yields are already near historic lows.

Apple’s market cap reaches $2 trillion amid tech-fueled rally

Shifting to equity markets, Cousley noted the S&P 500® Index officially put in a new high on Aug. 18, closing at 3,389. Noting that the record was clinched amid steep unemployment and a wobbly economic recovery only in its beginning stages, he said that markets are focused more on the potential for improved corporate earnings in the third quarter, as well as a labor-market rebound.

Cousley sees three key watchpoints for markets in the weeks ahead. The first revolves around the stalled fiscal stimulus negotiations in the U.S. Congress, he said, noting that he expects both the Republican and Democratic parties to eventually come to an agreement.

The second watchpoint, in Cousley’s opinion, is the narrow leadership of the current market rally, which is being driven by big tech companies. Speaking to the rise in tech-company valuations, Cousley noted that Apple recently became the first business to reach $2 trillion in market capitalization. “Put another way, a single company is now valued nearly as much as the entire Russell 2000® Index, which has a market cap of $2.3 trillion,” he remarked.

The third issue for markets to keep an eye on is the state of China-U.S. tensions, which have escalated in recent weeks after the U.S. announced bans on both TikTok and WeChat, Cousley said. Overall, though, he and the team of Russell Investments strategists don’t expect the souring relations between the two nations to spiral into another trade war.

How have global supply chains been impacted by COVID-19?

Turning to the impact of the pandemic on the global economy, Cousley noted that amid all the panic buying in March and April, there was widespread speculation that COVID-19 could deal a punishing blow to global supply chains this year. However, as time has passed, this has largely proven to not be the case, he said.

“Broadly speaking, the changes to global supply chains have been relatively marginal,” Cousley stated, noting that a recent survey by the U.S.-China Business Council—which consists of roughly 200 U.S. businesses operating in China—showed that 87% of its members have no plans to move production out of China.

However, some governments have shown a strong desire to bring production back home, he noted, particularly Japan. “The Japanese government is paying 87 companies to move their production lines from China back to Japan or to other neighboring countries in Southeast Asia,” Cousley explained. Overall, though, the more exaggerated forecasts from the spring—many of which predicted the demise of global supply chains—have not panned out, he concluded.


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