Financial markets continue to digest a myriad of (conflicting) headlines in an effort to formulate an outlook for the remainder of 2018 and beyond. Trade tensions remain a primary concern, although there were some positive developments in August (e.g., the Mexico trade agreement). Emerging markets have exhibited stress signals, which is not necessarily surprising given what has occurred in currency/commodity markets and trade policies. At the same time, the U.S. economy continues to expand at an above-trend rate, buoyed by tax reform and deficit spending. Monetary policy is a wildcard, particularly the perceived determination of the Federal Reserve to continue forward with policy normalization. A September rate hike is all but assured, but will central bank officials change forward guidance and discuss alternative policy tools, such as activating counter-cyclical capital buffers?
The U.S. economy continues to expand at an above-trend rate, but potential headwinds from trade policies and emerging market stresses are fueling some anxiety in financial markets.
A stronger dollar and U.S. trade sanctions have brought emerging market risks to the forefront.
The Fed is poised to hike again in September, but discussions surrounding the neutral rate of interest and alternative risk management tools have picked up in recent weeks.
On the data front, July consumption data were solid, and business investment continues to push higher. Regarding the latter, nonfinancial corporate profits rose in Q2 at the fastest year-over-year since 2005 on a pre-tax basis. After-tax profits were even more favorable given the effects of tax reform. As a result, business investment, in contributing more positively to overall economic growth, should ultimately lead to greater labor productivity growth assuming historical trends hold.