The Market Today
Markets Expect 25 BPS Cut After Flurry of Fedspeak Last Week
by Craig Dismuke, Dudley Carter
Chicago Fed National Activity Index Disappoints Slightly: The Chicago Fed’s National Activity Index rose from -0.03 to -0.02 in June, remaining negative and slightly disappointing expectations. The broad index of 85 economic indicators continues to point to more disinflation pressure than inflation pressure.
Sea Change for Monetary Policy Elevating Importance of Communications: At 10:00 a.m. CT, the Bank of Japan’s Kuroda is scheduled to speak at the IMF meeting in Washington. With central banks in the midst of a sea change for policy bias, any comments from the chiefs of the central banks have the potential to create market volatility. Also on the radar this week will be the ECB’s policy decision on Thursday. Speculation is that they will cut by September and this week’s communications will be key.
WSJ Article Points to 25 BPS Cut Next Week: Late in the trading day Friday, the WSJ published an article summarizing the recent Fedspeak saying, “Federal Reserve officials signaled they are ready to lower interest rates by a quarter-percentage point later this month, while indicating the potential for additional reductions, despite the recent surge in market expectations of a half-point cut. … Officials aren’t prepared for bolder action now.” The article, perhaps floated by Fed officials, seemed to solidify market expectations that the Fed would only cut 25 basis points – the big debate seen playing out in last week’s trading activity (see Chart of the Day). Heading into next week’s policy decision (July 31), the Fed appears to have communicated a preference for cutting rates 25 bps with an outside chance of a 50 bps cut.
Overnight – Market Volatility Calms as Fed Enters Quiet Period: Global markets are off to a mixed start this week following Fed confusion late last week that left investors expecting a rate cut later this month, but of the smaller variety than some had hoped for (more below). Stocks fell across Asia to start the week, with the biggest declines notched by the incumbent equity indices in China as yuan flow may have been diverted toward the new kid in Shanghai. A Nasdaq-like tech index debuted Monday by more than doubling in size, according to Reuters, which said the worst performer of the 25 companies rose more than 80%. Tech companies were little changed in Europe, however, where a 0.2% gain for the Stoxx 600 was helped out most by the index’s energy sector. Investors are keeping an eye on elevated tensions in the Middle East and Iran’s seizure of a British tanker last week. The cost of U.S. WTI and Brent crude rose more than 1% overnight. U.S. equity futures were also higher just before 7 a.m. CT and being led by a 0.4% gain in contracts on the Nasdaq. A busy week for corporate earnings announcements includes several major tech names such as Facebook and Amazon. Shorter treasury yields were little changed following last week’s Fed-induced volatility on Thursday and Friday, while the 10-year yield had moved down 1.2 bps to 2.04%.
ICYMI – July 19, 2019 Weekly Market Recap: For a second week in a row, Fed officials forewent multiple opportunities to push back on market expectations for easier monetary policy. In the biggest economic report of the week, retail sales were robust in June and revised up for April and May, leading to a sharp rise in Treasury yields as some questioned whether it could alter the Fed’s signal for a rate cut. Just a couple of hours later, however, yields fell back as Fed Chair Powell chose to remain focused on increased uncertainties that have strengthened the case for cutting. In a similar story Thursday, a couple of top Fed officials showed support for easing, even after the Philadelphia Fed’s Business Outlook Index reached a 12-month high on its biggest one-month gain since 2009. A surprisingly dovish speech from New York Fed President Williams caused particular confusion, earning a rare clarification from a bank spokesperson that his speech was “academic,” not a signal for policy actions at the July meeting. Williams’s speech had caused markets to nearly double their expectations for a 50-bps cut this month to a 65% chance before the clarification. Expectations for a 50-bps cut in July waned further Friday after the WSJ reported the Fed is “ready to cut interest rates by a quarter-percentage point” later this month but “aren’t prepared for bolder action by making a half-point cut.” Ultimately, rates ended lower with the market more convinced the Fed will cut as uncertainties continue to overshadow a nascent firming of the data. Click here to view the full recap.