In another round of attacks on the Federal Reserve, President Trump has a lot of attention focus on the bank but most analysts believe that its independence and a strong economy will dictate more hikes. While many market participants are looking at the tweets and commentary from the President as just noise, he is sending a clear message that he believes the rate hike cycle is too aggressive. Of course, he wants to slow down the process.
This coming week, we have a list of earnings reports coming to market and we expect them to be strong, likely strong enough to, along with solid macro releases, indicate a continued strong economy. There are few weak parts of the US economy right now and GDP growth at 3.0 to 4.0 percent combined with a tightening labor market, hikes are inevitable. Low inflation, at least for now, will be a core component of the Fed decision.
A slowing in the rate hike cycle in 2019 could produce a perfect situation for the President. And for now, some analysts are looking for 10-year yields to trade to 3.35% by December of this year. And the last time rates spiked to 3.5% or higher was in 2011.
We at Classiarius feel that the S&P 500 will drop between 15% and 17% before finding a base. We are not giving trade ideas but feel that we are seeing a one-month downtrend in equity markets. The last large one week drop was a 6 percent decline in March and an 18 percent drop in 2008. President Trump is able to announce strong growth and jobs growth at each rally and he would like to keep this economic expansion exactly the way it is for the November elections and beyond.