The big news last week was the Federal Open Market Committee (FOMC) statement on Wednesday, which removed the word "patient" and set the Fed up for potential 0.25% key interest rate cuts at its July and/or September FOMC meetings. Interestingly, the FOMC statement also acknowledged that there are "muted inflation pressures" and that "business fixed investment has been soft," which will cause the Fed "to act as appropriate." Seven of 17 FOMC members now forecast two 0.25% rate cuts, while eight FOMC members forecast just one 0.25% rate cut. Only St. Louis Fed President James Bullard wanted to cut rates immediately. As a result, I expect that the Fed will likely cut rates by 0.25% at its July meeting.
At his press conference on Wednesday, Fed Chairman Jerome Powell cited slowing global growth and lower interest rates as influences on slower U.S. economic growth. In fact, after his press conference, the 10-year Treasury bond fell below 2% in overseas trading for the first time since 2016. There is no doubt that persistent global capital flight to the U.S. is continuing to push Treasury yields lower. The market liked the Fed's report and soared to new highs on Thursday, capping the best June (so far) since 1955.
Europe Moves to Sink the Euro, Lifting Gold to $1,400
Last Tuesday, European Central Bank (ECB) President Mario Draghi, in a speech in Portugal, signaled that an interest rate cut and more ECB stimulus (bond buying/quantitative easing) would be forthcoming. This caused the euro to abruptly fall in value, the German 10-year bund to fall below -0.3%, and the 10-year U.S. Treasury bond to decline. Gold also hit a 14-month high over $1,400 in the wake of Draghi's comments, since negative interest rates in Germany and other major European countries are forcing investors to increasingly look at alternative investments. Here is a link to my podcast last Tuesday.
Complicating matters further, President Trump criticized ECB President Draghi on Twitter and implied that the ECB was purposely devaluing the euro and that a currency war may be forthcoming. President Trump's tweet said that Draghi's remarks "immediately dropped the Euro against the Dollar, making it easier for them to compete against the U.S. They have been getting away with this for years..."
President Trump also tweeted that he will have an "extended meeting" with Chinese President Xi at the G20 meeting next weekend, which sparked a stock market rally on the hope that there will be progress on the China tariff spat. In case you have not noticed, President Trump likes to have his trade fights one at a time, so if a China trade deal is reached fairly soon, then the European Union may be the next opponent to face the President's wrath in a tariff fight, especially in the wake of his latest ECB criticism.
Meanwhile, the U.S. economic news remains muted, giving the Fed room to cut rates. The Commerce Department announced on Tuesday that housing starts declined 0.9% in May to an annual pace of 1.269 million units. In the past 12 months, housing starts have declined 4.7%. Building permits have declined 0.5% in the past 12 months. (Building permits are healthier than housing starts, since homebuilders are gearing up to build more homes now that mortgage rates have declined to more affordable levels.)
The National Association of Realtors said on Friday that existing home sales rose 2.5% in May to an annual pace of 5.34 million, but in the past 12 months, existing home sales declined 1.1%. The median sales price in May was $277,700, 4.8% higher than a year ago. Existing home sales rose in all four regions. Due to lower mortgage rates, existing home sales are expected to steadily rise in the upcoming months.
Finally, the Conference Board announced on Thursday that its leading economic index (LEI) was unchanged in May after three straight monthly increases. Weakness in stock prices and manufacturing offset a positive consumer outlook. Nonetheless, the Conference Board still expects a moderate economic expansion, even though at a slower pace. Overall, the U.S. economy remains neither too hot nor too cold, which is characterized as a "Goldilocks" economy of modest growth, low inflation, and low interest rates.
Trump's Near-Miss on War with Iran
The other international news last week centered on Iran. The U.S. released a video that showed Iran's Revolutionary Guard removing an unexploded "limpet" mine from one of the oil tankers that was attacked in the Gulf of Oman. Naturally, this evidence will be damning in front of the United Nations Security Council. Since the attacked tankers were owned by Norway and Japan, these tanker attacks are a major concern to all countries that depend on Middle East crude oil. Back in the 1980s, a "Tanker War" erupted in the midst of the eight-year war between Iran and Iraq. This new threat to the global oil supply seemed to backfire on Iran, so they are quickly changing the subject to try to influence world opinion.
More troubling, Iran announced last week that it intends to violate the uranium stockpile limit that was set under its nuclear deal with the European Union, China and Russia. Although some are blaming the U.S. for withdrawing from the flawed Iranian nuclear deal, skeptics are saying that this is proof that Iran never intended to stick to the nuclear deal that the Obama Administration negotiated with the European Union.
Furthermore, after the tanker attacks, Britain dispatched Royal Marines to the Middle East to protect British ships after British Foreign Secretary Jeremy Hunt blamed Iran for the tanker attacks. Secretary Hunt said that minority Labour Leader Jeremy Corbyn was "pathetic" for saying that Iran was not responsible for the tanker attacks. Clearly, an international coalition is forming to confront Iranian aggression, so the fact that Iran now wants to violate the nuclear deal it signed with Britain, France, Germany, and the European Union, as well as China and Russia does not bode well for its credibility.
On Thursday, a sophisticated U.S. Navy high altitude MQ-4C Triton drone was shot down by an Iranian surface to air missile over the Strait of Hormuz in international airspace about 17 miles from Iran. The MQ-4C Triton drone can fly up to 60,000 feet and loiter for up to 30 hours. It has the wingspan of a Boeing 737 and costs $180 million. Iran also tried to shoot down another drone but missed. The MQ-4C Triton drone provides real-time intelligence, surveillance, and reconnaissance missions "over vast ocean and coastal regions," according to the U.S. military. The other significant incident was that Iranian-backed forces fired cruise missiles on Wednesday night into Saudi Arabia and hit a power plant.
Clearly tensions are rising, and it will be interesting to see if there is a retaliatory response. The U.S. wants to resume negotiations with Iran, and recent economic sanctions are intended to force Iran back to the negotiating table, since the Iranian economy has been devastated. By withdrawing from the nuclear deal it signed, Iran is clearly striving to find more dovish European nations to negotiate with.
Despite rising tensions and escalations, Iran seems to be hurting its credibility with the rest of the world, so right now military action seems unlikely, unless there are more tanker attacks that force a retaliatory strike. President Trump and National Security Advisor John Bolton have both made it clear that the U.S. is willing the start negotiations with Iran, so that is clearly the priority, not necessarily military action.
In the meantime, President Trump said on Twitter after the Navy drone was shot down that "Iran made a very big mistake!" When pressed by the media on the U.S. response, President Trump said, "You'll soon find out," which caused crude oil prices to rise on the anticipation of a potential military response. The New York Times on Friday reported that a retaliatory strike on Iran was ordered by President Trump but then abruptly called off. Again, the U.S. priority remains to get Iran back to the negotiating table.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.