The Market Today
Powell Appears to Set the Table for Rate Cut
by Craig Dismuke, Dudley Carter
Vining Sparks on Fox Business: Vining Sparks Chief Economist, Craig Dismuke, appeared on Fox Business this morning discussing what to expect from Fed Chair Powell’s congressional testimony today.
Economic Outlook Webinar – Why We Believe the Fed Will Cut Rates: Vining Sparks will host our 3Q Economic Outlook Webinar on Thursday at 10:00 a.m. CT. We will discuss why we expect the Fed to cut rates this year, perhaps as early as July 31, but also detail why we believe the cut will be an “insurance” cut – not one associated with fear of recession. To register for the webinar, please click here.
Investors Hope for Coos from Fed Chair Powell in Congressional Testimony: Fed Chair Powell will testify before the House Financial Services Committee at 9:00 a.m. CT in a now-much-anticipated appearance. With the Fed debating cutting rates, the nuance of his message will be closely watched by investors. At his post-FOMC press conference in June, Powell repeated seven times that Fed officials would be looking to see if the uncertainty from trade policy and weak global growth continues to weigh on the economic outlook. Since that time, no trade deal has been resolved, although talks have at least resumed. Global data have remained discouraging. And U.S. GDP growth for 2Q has tracked lower from 2.0% to 1.3% based on incoming data (Atlanta Fed GDPNow, see Chart of the Day). Perhaps most importantly, the markets are anticipating a cut based on the framework for policy expectations that Fed officials have communicated. If Powell seems blind to those issues, the markets are likely to respond with volatility. There is little consensus heading into the testimony with some economists expecting him to push back on rate cuts and some expecting him to push the ball a little further down the field.
Prepared Remarks Set Table for Rate Cut in Three Weeks: In his prepared remarks, released at 7:30 a.m. CT this morning, Powell appears to be taking the dovish road as evidenced by the immediate drop in short Treasury yields. Powell notes in the comments that “uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook” and that weaker-than-target inflation could prove “even more persistent than we currently anticipate.” While Powell may nuance the messaging during his Q&A, the prepared comments clearly set the stage for a rate cut in three weeks. The only plausible roadblocks at this point would be a surprisingly hot inflation report or the conclusion of a trade deal before July 31.
At 1:00 p.m. CT, the Fed will release the Minutes from their June 19 FOMC Meeting. However, Chairman Powell’s testimony will provide a more timely assessment. Also on the calendar are comments from St. Louis Fed Bank President Bullard and Kansas City Bank President George.
Mortgage Applications Fall but Positive Trend Remains: Mortgage applications for the week ending July 5 fell 2.4% on a 2.3% increase in purchase apps and a 6.5% decline in refi apps. Purchase applications have slowly been grinding higher, up 11% on a monthly average basis versus year-ago levels. Despite the weekly decline in refi apps, the 4-week moving average is now up 134% from activity in November.
Yesterday – Stocks Recovered as Yields Rise for Third Day on Dimmed Hopes of 50 bps of July Easing: Stocks gradually clawed their way back from an early drop and the primary indices ended Tuesday’s trading near their session highs. Divergent sector performances led to different degrees of intraday recovery, as strength in tech shares pushed the Nasdaq back into positive territory more quickly and convincingly than a modest gain for the S&P 500. The tech-heavy index gained 0.5% Tuesday while the S&P 500 added a smaller 0.1%. The Dow closed down less than 0.1%. The S&P 500’s tech sector was among the seven of eleven that closed higher, which were led by gains in real estate. Large losses from materials companies, however, neutralized the broader optimism. Earlier in the day, Germany’s DAX dropped 0.9% to lead a down day in Europe after a top German materials company severely cut its full-year outlook, weighing on the sector globally. BASF warned its results would be hurt more than expected by ongoing U.S.-China trade tensions and weakness in global auto activity. Treasury yields dipped as equities opened lower but eventually rose for a third consecutive session since last Friday’s U.S. payroll report. In front of this morning’s testimony from Chair Powell, the 2- and 10-year yields both rose 1.7 bps to 1.91% and 2.07%, respectively. Over the last three sessions, the 2-year yield has added around 15 bps while the 10-year yield has risen just over 11 bps, with most of the move coming last Friday.
Overnight – Treasury Yields Dragged Higher By Europe Ahead of Powell’s Highly Anticipated Testimony: U.S. equity futures weakened for a fourth overnight session and Treasury yields rose as the waiting game for Fed Chair Powell’s congressional testimony neared its end. Equities were mixed across Asia and mostly lower in Europe, although France’s CAC 40 and Italy’s FTSE MIB gained on better-than-expected economic data. Industrial production in France rose 2.1% in May, eclipsing expectations for a 0.3% gain with ease, while output in Italy rose 0.9% to pass the 0.2% gain economists had forecasted. The timing of those reports lined up with two of the most notable moves higher in European bond yields. A reportedly weaker auction of German 10-year bonds coincided with the third uptick, as demand waned in the face of historically low yields. Germany’s 10-year yield was 6.6 bps higher at -0.29% around 7 a.m. CT, a more than 10-bps bounce off its all-time low reached last week. Despite the upbeat economic data, concerns about trade tensions and the negative effects on global growth are key reasons investors expect Powell to remain cautious in today’s testimony. In its summer forecast released overnight, titled “Growth Clouded by External Factors,” the European Commission trimmed its 2020 forecasts for both growth and inflation by 0.1%, to 1.4% and 1.3%, respectively. Before Powell’s prepared remarks were released, the 2-year Treasury yield was 1.5 bps higher at 1.92% and the 10-year yield had added 3.5 bps to 2.10%. Immediately after his prepared remarks were released showing Powell will tell Congress risks “continue to weigh” on the outlook, the 2-year yield sank and Dow futures turned positive. The 2-year yield moved from up 1.5 bps to down 4.2 bps on the day.
Job Openings Edged Down in May: Job openings fell unexpectedly in May to 7.323MM from 7.372MM in April, which was revised down 77k from the initial estimate. Trade, transportation, and utilities openings dropped 99k to lead declines across six of the main 11 sectors. In other notable declines, the number of open construction jobs dropped 65k after two months of solid gains while federal openings shrank by 41k. While multiple manufacturing surveys have shown activity is being negatively impacted by global economic uncertainty, job openings across the sector have risen in four of the last five months. As a result of May’s decline, the overall openings rate ticked down from 4.7% to a still-solid 4.6%. Despite modest slowing across other metrics – hires and quits also edged lower in May – the number of openings exceeded the number of unemployed for a 15th consecutive month, the quits rate match its best level of the cycle, and layoffs remained low.
Bostic Says Fed Pondering “Little Hotter” Labor Market, Harker Not Convinced Cut is Necessary: Fed Chair Powell and St. Louis Fed President Bullard, June’s lone dissenter, offered welcoming remarks at separate events yesterday but avoided discussion of the economic outlook or monetary policy. Fed Governor Quarles discussed stress testing, but he too avoided the economic outlook. Atlanta Fed President Bostic, who doesn’t vote again until 2021, said the Fed is discussing whether it would be a net cost or benefit to allow “the economy to run a little hotter.” However, in an interview published by the WSJ on Tuesday, Philadelphia Fed President Harker, who will vote on policy in 2020, indicated his dot was one of the eight that expects rates to remain unchanged for the remainder of the year. “The U.S. economy continues to be strong,” Harker said, adding the data shows “we still have a very strong labor market.” He would need to believe “the economy was weakening substantially” to support a rate cut, “which at this point, I do not see that, …There’s no immediate need to move rates in either direction at this point in my view.” Even though inflation has been weak, Harker noted “I don’t see as an imminent crisis, and I think we can give it some time to move back up to 2%.”
Community Banks Avoid Volcker in Final Rule: According to a press release on the Federal Reserve’s website, “Five federal financial regulatory agencies announced on Tuesday that they adopted a final rule to exclude community banks from the Volcker Rule, consistent with the Economic Growth, Regulatory Relief, and Consumer Protection Act. The Volcker Rule generally restricts banking entities from engaging in proprietary trading and from owning, sponsoring, or having certain relationships with hedge funds or private equity funds. Under the final rule, which is unchanged from the proposal, community banks with $10 billion or less in total consolidated assets and total trading assets and liabilities of 5 percent or less of total consolidated assets are excluded from the Volcker Rule.”