Strong Growth is Leading to a More Aggressive Fed

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Federal Reserve officials have raised interest rates for the second time this year. Although this move was widely expected, the surprise in the report was that the Fed communicated that they expect that they will raise rates two more times in 2018.

In the press conference, Fed Chairman Jerome Powell stated that economic growth is strong so interest rates can move back to a more normal level from the very low levels after the financial crisis in 2008. While the upward hike of interest rates in the U.S. is relatively gradual, it is clear that policymakers feel that a slightly more aggressive approach is necessary.

Economic growth in the coming quarters will likely be even stronger than normal due to the recent tax cuts, as well as increased federal spending.  Due to its strong, stabilized state, the Federal Open Market Committee believes that, regardless of rising interest rates, economic growth will continue at a competitive pace and inflation will remain contained.

 

European growth disappoints

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The eurozone has experienced softer than expected growth numbers in recent months. This is likely due to the fact that industrial production has disappointed since March. Output from mines and factories across the 19 countries in the eurozone was 0.9% lower in April than it was in March, a sharper decline than expected.

Each of the eurozone’s five largest members saw a significant drop in output, most notably the Netherlands, which experienced a decline of 4.4%. Economists are attributing the slowdown to a loss of business confidence, due to the trade tensions with the U.S. government, the ongoing uncertainty around Brexit and political uncertainty in Italy.

Despite the recent weak economic data, the European Central Bank announced on Thursday that it will end monthly asset purchases, a form of economic stimulus, in December 2018. However, they also indicated that they will likely not raise rates until the summer of 2019.

 

Tariffs on Chinese goods may catalyze negotiations:

As Washington planned to release the list of Chinese goods targeted for tariffs, the latter government reiterated its threat to abandon trade deals with the U.S. These threats come in the midst of a trade dispute between the U.S. and China, which may be the first steps towards new negotiations. While Beijing has expressed openness to purchasing more American exports, its position regarding the tariffs is firmly negative.  A foreign ministry spokesman, Geng Shuang, states: “We made clear that if the U.S. rolls out trade sanction including the imposition of tariffs, all outcomes reached by the two sides in terms of trade and economy will not come into effect[…]”. It is somewhat unclear how the tariffs, if executed, will affect the U.S. budget, or its overall imports and exports. For example, with the $50 billion proposal on Chinese imported metals such as steel, it is likely that the tariff revenue would fall between 5 and 12.5 billion. However, this is dependent on whether or not U.S. buyers continue to bring those metals in from China.

 

AT&T and Time Warner Merger:

Federal judges recently approved the merger between AT&T and Time Warner. The first mention of this merger was in 2016, when AT&T stated that they would pay $85.4 billion to acquire all of Time Warner’s assets. The  merger was initially blocked by the Justice Department, due to warnings that such a mega-deal would hurt competition and raise prices for consumers. Regardless, the merger was approved, and the deal is expected to be closed by the end of the month. Immediately following the approval of this merger, companies such as Comcast and Disney have begun placing their bids to get their own mega-deals. It is clear that this deal was widely viewed as a landmark decision that would impact the appetite for mergers.