BULLISH INTEREST RATE INFLUENCE TENDS TO DOMINATE ALL OTHERS


There is one fundamental has dominated all the way up from when this historic bull market first began in March 2009 and it remains with us today. This fundamental ultimately dominated over a multitude of temporary bearish influences that have sprung up in the past decade, including political turmoil, banking crises, crude oil price shocks and severe weather related economic downturns. And yes, it will most likely eventually dominate over the current and seemingly insurmountable U.S.-China trade dispute.


This fundamental is the still very accommodative Federal Reserve in spite of the nine 25 basis point hikes in the fed funds rate to 2.25% - 2.50% since December 2015. And now the Federal Reserve has reversed its tightening course when on July 31st it lowered its fed funds rate by 25 basis points to 2.00-2.00%. This reduction in rates is likely to be the first in a series of rate cuts from the Federal Open Market Committee. At least one more fed funds rate reduction appears to be priced in before the end of the year, probably at the September 18 FOMC policy meeting.


Chart 2: U.S. FED FUNDS RATE


On July 25th the European Central Bank at its policy meeting, signaled it is preparing to cut short term interest rates and may restart its massive bond buying program. The ECB statement sent a strong signal that the central bank of the E.U. is preparing to announce a major stimulus plan as soon as at its next policy meeting on September 12th.


The Bank of Japan left its monetary policy unchanged at its July 29-30 meeting, which was expected. However, Japan’s central bank said it wouldn’t hesitate to ease monetary policies further if the need should arise.


With some overseas interest rates remaining near or at historical lows and in many countries in Europe and in Japan, interest rates are still negative. There is still plenty of accommodation in the domestic and international banking systems with more coming. In the weeks ahead there will be calls for easier credit conditions from the Federal Reserve and other major central banks, which will likely place a bottom on U.S. stock index futures.


In spite of the ongoing global trade tensions and the slowing global economy, my view remains that the global reflation scenario is on track and easier credit conditions from most of the world’s central banks, including the Federal Reserve, are coming and will be the dominant fundamental that supports U.S. stock index futures in the long term.


Source: TradingEcomics.com | Federal Reserve


The Federal Reserve is not alone in its move towards accommodation. Central banks around the world are becoming increasingly dovish in the face of a global economic slowdown in growth. The European Central Bank, the Bank of Japan and a variety of other central banks have indicated they are in a similar frame of mind.


Alan Bush


E: alan.bush@admis.com T: 001 312 242 7911


9 | ADMISI - The Ghost In The Machine | July/August 2019


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