The Market Today
Powell Goes to The Hill, FOMC Minutes, Consumer Inflation Report
by Craig Dismuke, Dudley Carter
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. There has been a sea change in the interest rate environment because trade negotiations have been more protracted than expected and inflation has, again, undershot expectations. 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.
THIS WEEK’S ECONOMIC CALENDAR
Final CPI Inflation Report Before FOMC’s July Decision; Fedspeak: This week’s economic calendar is important on a few accounts. First will be tomorrow’s report on small business sentiment. Sentiment sank early in the year when trade negotiations became more contentious than expected but has rebounded in recent months. June’s report will be the final look at this important indicator before the Fed’s July 31 policy decision. Even more important will be the final CPI inflation report, released on Thursday. Core CPI is expected to hold at 2.0% YoY, its weakest level over the past 15 months. Also offering investors insight will be the June FOMC Meeting Minutes, released Wednesday. Frequently during this modern era of transparent Fed communications, officials have used the Minutes to hint at subsequent policy decisions. Chairman Powell will also be testifying before Congress on Wednesday and Thursday, perhaps offering more insight into his take on the last week’s mixed economic data.
Overnight – Equities Still Contemplating the Fed Effect of Last Friday’s Strong Jobs Gain: Global equities continued to respond with caution to last Friday’s stronger-than-expected U.S. jobs reports. The larger-than-expected rebound in hiring in June weighed on the corner of the market expecting the Fed may cut rates by 50 basis points when they meet at the end of the month. Treasury yields shot higher Friday as Fed Funds futures responded by trimming the degree to which the market expects the ease policy. U.S. equities dropped on weaker prospects for significant monetary policy accommodation, setting the stage for Monday’s sluggish global session. Chinese stocks sold off more than 2% to lead widespread weakness across Asia, and Europe’s Stoxx 600 ticked down 0.1%. U.S. futures were off by roughly 0.3% just before 7:30 a.m. CT, and after Friday’s big move in Treasury yields, the curve had edged lower and flatter. The 2-year yield was 0.6 basis points lower at 1.85% and the 10-year yield down 1.6 basis points to 2.02%.
ICYMI – July 5, 2019 Weekly Market Recap: The market’s near-term expectations for Fed policy were complicated last week by cooler trade tensions between the U.S. and China and surprisingly solid hiring that leaned against weaker signals from two ISM reports. The U.S. and China suspended all plans for new tariffs to allow trade negotiations to resume, with the U.S. saying it would ease Huawei restrictions while China would buy more American agricultural products. On Friday, the BLS reported that 224k jobs were added in June, a hiring figure that easily cleared expectations and cut into the market’s belief the Fed will lower rates by 50 basis points later this month. However, there were several reports showing a still-solid case to be made for an insurance easing. Wage growth remained modest and unemployment rose on a second month of stronger participation. Additionally, PMIs from China, the Eurozone, and the U.S. all continued to point to activity slowing. Most concerning was the ISM’s non-manufacturing index that showed the U.S. services sector expanded at its slowest pace since October 2016. By Friday’s close, the 10-year yield had added 3.6 basis points to 2.04% and futures were pricing in a shallower path for the Fed Funds rate. Click here to view the full recap.