Slowbalized Output

Central bankers are at it again.  Whether you believe they are manipulating currencies or simply trying to support their respective economies, the trend for monetary policy makers is to error on the side of easing.  This was particularly evident this week from two of the worlds’ most influential central banks: the European Central Bank (ECB) and our very own Federal Reserve (the Fed).

Mario Draghi got things started early Tuesday morning in a market-moving speech.  At about 10 minutes to 2:00 AM in the Atlas time zone, he alluded to the ECB being ready to cut interest rates and willing to start another round of quantitative easing (bond buying).  He believes they have “considerable headroom” to purchase assets.  In other words, the ECB is concerned about the growth trend in Europe and is willing to adapt its policies to counteract a downward move.  And then there’s the news out of the Eccles Building on the American side of the pond.

The Fed wrapped up its two-day meeting on Wednesday, and its tone sounds equally supportive of America’s economy.  Our output’s trend has been gradually losing steam since the recent growth peak in the second quarter of last year.  Additionally, inflation has fallen woefully short of the Fed’s target of 2.0 percent despite unemployment sitting at generational lows given their historically inverted relationship.  Chairman Jerome Powell said that they will use their tools to “extend” the current expansion at Wednesday’s press conference.  More importantly, the Fed removed the word patient from its statement, a move Atlas sees as signaling a rate change at the July 2019 meeting.  If we keep heading east, we find other central banks willing to support their economies.

Three other central banks appear ready to support their own growth rates.  Monetary policy makers in both Australia and India have already lowered interest rates.  Meanwhile China’s central bank stands ready to buttress its economy’s output as well.  Concerns over a trade war have the central bank governors there quantifying its capacity to help China.  In an interview with Bloomberg, People’s Bank of China Governor Yi Gang shared that he believes there is “tremendous” room to adjust policy if trade tariffs slow output in the world’s second largest economy.

So there you have it, the business cycle has been repealed.  Central bankers around the globe stand ready to jump into action before the next global contraction takes hold.  Could you hear the sarcasm?  Yes, they are willing to push against the next slowdown, but Atlas does not believe the business cycle is dead.  We will see a contraction in the future, and Atlas stands ready to watch for market indicators suggesting the current bull market is in trouble.  When the signals occur, we will change the allocation, opting for a more conservative mix in the portfolios’ composition.