The Market Today
First Rate Cut in Ten Years: 25 or 50 Basis Points?
by Craig Dismuke, Dudley Carter
FOMC Poised to Cut Rates for First Time in Ten Years: The FOMC is poised to cut rates this afternoon for the first time in ten years. The consensus expectations is for a 25 basis point cut with language that leaves open the possibility of a future cut. There is a smaller camp of economists/analysts/investors who believe the Fed could cut 50 bps at today’s meeting, trying to get ahead of market expectations and cut a sufficient amount to insure against an economic downturn. Either outcome would placate markets but anything short of these would likely result in significant market volatility. At issue for Fed officials is the continued uncertainty over the economic impact of the prolonged trade dispute, the impact of increased tariffs with the U.S.’s largest trading partner, the potential impact of weaker global growth, and persistently below-target inflation. The FOMC’s decision will be published at 1:00 p.m. CT followed by a press conference for Chair Powell at 1: 30 p.m.
ADP Report Shows Labor Market Continues Expanding, but at Slower Pace: The ADP Employment report showed fractionally better private sector hiring in July than expected, up 156k for the month along with a +10k revision to the June report. Economists expected 150k private payrolls added in the ADP report. While job growth appears to be continuing at a decent pace, it has certainly slowed in 2019, particularly for goods-producing companies and smaller business (0-49 employees). The three-month average for total private payroll growth has now dropped to 104.5k, its slowest rate since the beginning of the recovery. The three-month average for goods producing jobs has dropped to -4.9k, also the weakest of the cycle. This is affirmation of one of the Fed’s concerns as they get ready to make their policy decision, the slowing of economic activity and unknown impact on real activity.
Yesterday – Treasury Yields Slipped with Stocks as Trade Worries Remained and More Data Raised Questions about the Need For a String of Cuts: For a second time this week, the S&P 500 pulled back from last Friday’s record close as investors awaited this afternoon’s Fed decision, which markets believe will be to lower the Fed Funds range by a quarter-percentage point. The index dropped 0.3%, although several sectors were led higher by energy companies which benefited from a strong day for crude prices. Anticipation of additional Fed rate cuts remained well priced into the futures markets, but the conviction behind those calls was likely complicated by Tuesday’s trade developments and stronger economic data. While tweets from the President likely weighed on already-subdued expectations for substantial progress in this week’s negotiations, several economic reports showed the U.S. consumer continues to weather the storm. The Fed fears trade uncertainty will start to slow the U.S. economy, but data showed consumers saw strong wage growth in June, continued to spend at a solid rate, and had more stocked away in savings than previously thought. Additionally, consumer confidence came roaring back in July (more below). Weak inflation has given the Fed comfort that the risk of easing policy was low but core inflation also firmed up. Despite a marginally-higher Fed-Funds-futures’-implied yield path, Treasury yields did tick lower. The 2-year yield fell 1.2 bps while the 10-year yield dipped 0.7 bps.
Overnight – Trade Talks End, Markets Await the Fed: Global equities traded mix overnight session while sovereign yields have inched almost exclusively lower as investors juggle a host of considerations Wednesday. Corporate earnings announcements continue to affect global equities but have been overshadowed, at least for today, by trade discussions and anticipation of this afternoon’s Fed decision. Despite some better U.S. data in recent weeks, the Fed’s expected to ease in response to a dim global outlook. The latest round of trade talks concluded overnight with few signs of any concrete progress, although a state-run Chinese news outlet described the meeting as a “candid, efficient and constructive exchange on major economic and trade issues of mutual concerns,” according to a Bloomberg report. Another round of face-to-face meetings between top officials has been scheduled for September in the U.S. according to the same report. Just before the meeting concluded, official government data showed a slightly stronger-than-expected recovery in China’s manufacturing activity in July. However, the PMI’s rise to 49.7 marked the third consecutive month of contraction. Despite mixed moves elsewhere, U.S. futures were stronger ahead of ADP’s jobs data after Apple’s most recent quarter’s earnings topped estimates and current-quarter revenue guidance exceeded expectations (after markets closed Tuesday). Treasury yields held lower after ADP projected a roughly in-line result, with the 2-year yield down 1.4 bps and the 10-year yield down 0.4 bps.
Second Wave of Data Tuesday Showed Upside Surprises for Housing and Consumer Confidence: The late slate of Tuesday data was surprisingly strong, showing a larger-than-expected gain for pending home sales and a stronger-than-expected recovery in consumer confidence. Pending home sales rose 2.8% in June according to the latest update from the National Association of Realtors, easily outpacing the 0.5% increase expected and reflecting stronger activity across all four geographic regions. June’s gain came as mortgage rates, according to Freddie Mac, declined to two-and-a-half-year lows and points to strength in existing home sales in the months ahead. In the consumer report, confidence roared back in July from a June level that was not quite as disappointing as initially estimated. June’s initial 9.8-point drop was revised up to an even 7-point decline, helping July’s 11.4-point jump, the largest since 2011, push the index up to its highest level since November (third highest since 2000). The details were robust, with consumers’ current assessment of and future expectations for business conditions, the labor market, and income growth all notably stronger. The data won’t sway the Fed’s decision today, but adds to a recent string of stronger reports that could affect expectations for meetings later in the year.