Here's why the Fed may be nervous about the US economy
- With the economy booming after a record stock market high and relatively good employment levels people have been asking why the Fed looks set to cut.
- Investors have been expecting the rate cuts, with the stock market rallying.
- Shipments have fallen for a seventh straight month, a sign the trade war with China is hammering trade.
- The Fed may be watching the freight data.
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The stock market is hovering near records and unemployment is at a healthy 3.7%, yet the Fed looks set to cut rates as soon as this month. Why?
"There initially seems to be little reason for the Federal Reserve to be considering interest rate cuts, but a collapse in US freight traffic suggests the central bank may have cause to be nervous about the American economy after all," said said Russ Mould, investment director at AJ Bell.
Shipments fell for the seventh straight month - the worst slump since 2016, suggesting trade tensions with China are having an effect on movement of goods.
"Investors need to pay just as much - if not more - attention to the Dow Jones Transportation index as the better-known Dow Jones Industrials average," Mould said in a note to clients on Tuesday.
If transport indexes are poor then industrials ones would eventually start to struggle, and vice versa, Mould says.
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"The failure of the Dow Jones Transportation index to set new all-time highs, even as the Dow Jones Industrials does so, is therefore a trend that must be watched," he said in a note on Tuesday. Transportation stocks are about 10% below their all-time high, he said.
So if shipments are down, Mould is suggesting that industry isn't doing as well as we thought.
"After all, if the Fed does start to cut interest rates, and not just once but two or three times as markets seem to expect, then surely it will be doing so because the economy is going south," he said. " That would be bad for American corporate profits, where growth has already slowed markedly, and that could in turn leave US stocks looking very exposed from a valuation perspective."
Mould adds: "This is exactly what happened during the 2000-03 and 2007-09 bear markets, which even frantic interest-rate cutting from the American central bank could not prevent.
However, Mould did point out that if a trade deal between China and America did come about or a White House stimulus then the doom and gloom scenario looks less likely.