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June 5, 2019 | Rate Cuts Resuming in 2019, but Oz is No More

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel ( Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog:

Yesterday, as stocks celebrated odds of US Fed rate cuts in 2019, a World Bank report reduced its semi-annual forecast for global growth to 2.6%–from 2.9% at the start of the year—and slashed its forecast for growth in trade to 2.6% from 3.6%.  This downgrade did not include further weakness from an additional 25% US tariffs on Chinese and Mexican goods that could begin this month.

Shrinking output is evident around the world, with May’s US ISM factory index falling to 52.1–the lowest reading since October 2016, and JPMorgan ’s Global Manufacturing PMI index falling below the 50 level that denotes contraction from expansion.  See WSJ: Global Economy Cools Faster than Expected.

If the US Fed cuts its policy rate (presently 2.5%), the Bank of Canada is pretty certain to follow (presently 1.75%), just as the Bank of Australia did yesterday– responding to world-record household indebtedness and weakness in that nation’s (also) obscenely valued housing market.   See:  Bank of Canada poised to follow Fed with rate cuts, traders bet.

Lowering already low rates will not pack much punch here though.  The bind is not high-interest rates, but a cash crunch caused by too much debt, too high asset prices, and too little wage gains over the last three decades.

Central banks are pulling ineffective levers now.  The Great Oz is no more.  Free-falling demand, Treasury yields and commodity prices, confirm it.

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June 5th, 2019

Posted In: Juggling Dynamite

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