Following the worst week for stocks of 2019, investors are adding to bets that the Federal Reserve will continue lowering interest rates to stabilize the economy.
The familiar question is whether the central bank will cut as aggressively as skittish traders now expect.
Federal-funds futures, used by traders to wager on the direction of monetary policy, show a 100% chance of another rate cut in September, up from 56% a week earlier. Those odds surged late in the week as stocks and bond yields tumbled—declines triggered by fears that 10% tariffs on about $300 billion of Chinese goods starting Sept. 1 will substantially slow the economy.
Expectations for rate policy later in 2019 also show a heightened level of anxiety about the U.S. economy. About 75% of investors are expecting at least two more rate cuts in the Fed’s three remaining meetings of the year, according to federal-funds futures.
Analysts are dealing with uncertainty about whether a sharp slowdown in factory activity and growth overseas will spread to the U.S. economy, which has remained steady thanks to resilient consumer spending and a stable labor market. With the new tariffs affecting consumer goods such as cellphones and clothing, some investors are wary that a recent growth slowdown in the U.S. could accelerate.
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Business investment, a critical source of economic growth, also continues to soften.
“The world is so interconnected, and we see that as a global copper producer,” Richard Adkerson, CEO of copper miner Freeport-McMoRan Inc., said in an interview. “We’re going to be very conservative in this environment.”
Prices for the industrial metal, which is heavily used in construction and manufacturing, had their worst week in more than a year last week, dropping 4.2% to their lowest levels of 2019. They are 14% below a mid-April peak. Copper tends to rise and fall with expectations about the Chinese economy, which accounts for roughly half of global demand.
A gauge of manufacturing in the world’s second-largest economy has been in contraction territory for three months now, while other measures of global factory activity have also declined. China threatened to retaliate if the U.S. moves ahead with the fresh tariffs, though many analysts say Beijing faces limited options to strike back without hurting its own economy.
Fears about a world slowdown affecting the U.S. are increasing focus on coming earnings and economic data points. Investors will be closely watching figures on activity in the services sector this week, as a bifurcation between companies that provide goods and those that provide services has exacerbated worries about a sharp downturn.
The latest batch of second-quarter earnings results could also impact expectations for a slowdown in spending and softening profits at large U.S. companies.
are among those reporting their latest figures this week.
Even though many companies have reported steady consumer demand for their products, some analysts are wary that consumers will grow more cautious if the latest tariffs take effect. The yield on the benchmark 10-year U.S. Treasury note, which affects everything from auto loans to mortgages, fell to fresh multiyear lows late last week. Bond yields fall as prices rise and have tumbled this year with investors seeking safer assets.
Another worrisome development for market watchers: The three-month Treasury yield surged further above the 10-year yield late last week. Shorter-term yields eclipsing longer-term ones is known as a yield curve inversion and has preceded the last several recessions, though the time between such inversions and recessions has varied.
Still, many analysts remain optimistic that the U.S. economy can continue expanding even if growth slows down. The Citigroup Economic Surprise Index for the U.S., which measures broadly whether data points are meeting expectations, has risen sharply in recent weeks. However, it remains in negative territory, meaning economic figures are generally coming in softer than anticipated.
The mixed economic picture is a continuing challenge for Federal Reserve officials, whose comments between now and the central bank’s mid-September meeting will now be scrutinized even more.
“The pressure is mounting on the Fed to provide more policy support,” Capital Economics analysts said in a note to clients.
Write to Amrith Ramkumar at email@example.com
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