Fed cuts rates. The Federal Reserve (Fed) announced yesterday it would reduce its policy rate by 25 basis points (0.25%), the first rate cut since the financial crisis. The Fed also said it would end its asset sales on August 1, instead of in October (as previously planned) in order to align its balance sheet and rate policies. Fed Chair Jerome Powell was careful to classify the rate change as a “mid-cycle adjustment” instead of the beginning of a lengthy series of cuts in response to weakness.
Financial markets swoon. Investors found it difficult to interpret the Fed’s intentions, even as Powell emphasized an upbeat economic outlook and pinned looser policy on growing global uncertainty. The S&P 500 Index slid 1.1%, its biggest drop since May 31, while the 10-year Treasury yield dropped to 2.01%, leading to a flatter yield curve. Global stocks are quiet this morning, but we wouldn’t be surprised to see a bout of volatility now as investors digest Powell’s comments. We’ll provide more thoughts on the Fed decision in today’s LPL Research blog post.
Disappointing manufacturing data. Final Markit Purchasing Managers’ Index (PMI) readings internationally confirmed that the global manufacturing sector continues to slow. Eurozone PMI fell to 46.5 in July, while Germany’s PMI dropped to 43.2. Underlying details show deteriorating confidence among manufacturers in the Euro area, as well as a decline in employment amid several months of weakness. A Fed rate cut (along with loosening policy globally) could boost corporate sentiment and lower the U.S. dollar, which should lift global demand and aid overseas economies.
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