The Market Today
Powell Sends Signal for Rate Cut Before Second Hottest Core Consumer Price Gains Report Since 2006
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 this morning 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.
Second Hottest Core Consumer Price Gains Report Since 2006: Consumer prices rose a tepid 0.06% MoM in June as energy prices sank 2.4%, but rose a firmer 0.29% MoM when excluding volatile food and energy prices. The 0.29% MoM gain for core prices was the second-hottest month tally since 2006, only surpassed by January 2018’s report. Housing inflation rose 0.27%, on the firmer side of recent readings, as rent prices rose 0.42% and owners’ equivalent rents rose 0.31%. Prices of lodging away from home did fall 0.64%, but do not make up a large enough part of the calculation to override the strong gains in rents. Medical care prices had another strong month of gains, nearly doubling their 12-month run rate (+0.16%) rising 0.29% MoM. After several months of price declines, used car prices jumped 1.6% MoM. New car prices were up just a fractional 0.07%. Apart from the big three, apparel price gains were strong rising 1.1% MoM on gains in women’s and men’s clothing, and footwear. Recreation prices fell 0.15% MoM, education and communication prices rose 0.09%, and other goods and services fell 0.12%. This is a very brisk month for consumer price gains which will turn the tide of weak inflation data for the time being. Fed Chair Powell will likely be given a chance to comment on it at today’s congressional testimony. It will certainly give the less-dovish Fed members something to focus on.
Initial jobless claims for the week ending July 6 fell from 22k to 209k in yet another sign that the labor market remains unscathed by the recent trade policy uncertainty.
Fedspeak to Fine Tune Powell’s Message: There is plenty of Fedspeak to take in today. Fed Chair Powell is back testifying before the Senate Banking Committee at 9:00 a.m. CT. New York Bank President Williams will speak in Albany at 12:30 p.m. Also on the calendar are Atlanta’s Bostic (11:15 a.m.), Richmond’s Barkin (11:30 a.m.), Vice Chair Quarles (12:30 p.m.), and Minneapolis’s Kashkari (4:00 p.m.).
Yesterday – Markets Rallied On Powell’s Signal a Cut Is On the Way: Several days of market worries that a stronger-than-expected jobs report might dissuade the Fed from cutting rates were proven to be unfounded. U.S. employers hired 224k workers on a net basis in June, 64k more than economists had expected and a large enough number to cause markets to second guess expectations for a large downward adjustment to the Fed Funds rate later this month. However, Fed Chair Powell’s prepared remarks for his congressional testimony signaled the Fed believes the “uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook.” The 2-year yield, which had risen 1.9 bps overnight, dropped sharply and immediately on the release of those remarks to down 6.9 bps on the day. Equity futures, which had weakened for a fourth overnight session, quickly turned a 0.2% loss into a 0.5% gain. That sentiment strengthened during the Q&A portion of his appearance before a House committee as dovish answers to a couple of key follow-up questions (more below) did nothing to quell reinvigorated market conviction that the Fed was leaning towards a rate cut in three weeks’ time. The 2-year yield closed 7.9 bps lower at 1.83% as the probability of a 50-bp rate cut recovered to over 20%. The 10-year yield was more stable, dropping just 0.4 bps to 2.06%. The S&P 500 rallied briefly above 3,000 for the first time before ending the day up 0.5% at 2,993 and just shy of a new record. Sector gains were broad but left out the financials sector, negatively impacted by lower rates, and industrials and materials companies, which are heavily affected by trade uncertainty and global growth concerns.
Overnight – U.S. Markets Juggle Firmer Inflation and Powell’s Signal of Likely Fed Ease: U.S. equity futures signaled a carryover of yesterday’s positive momentum and the Treasury curve steepened further as short yields continued to move lower. In the first half of Powell’s two-day congressional testimony, the Fed Chair told lawmakers in the House that global uncertainties continue to weigh on the outlook, and indicated that one strong jobs report wouldn’t be enough to offset that (more below). While U.S. assets responded sharply to his tone, the global reaction has been more mixed. Asian equities were generally firmer overnight while European equities were mixed. The Stoxx 600 is less than 0.2% higher since the moment Powell’s prepared remarks were released Wednesday and sparked the U.S. rally. It is, after all, the slowdown in Europe that is a key concern behind the Fed’s likely rate cut later this month. Minutes from their June meeting showed ECB is likely to join the Fed in easing policy soon, as “there was broad agreement that, in the light of the heightened uncertainty, which was likely to extend further into the future, the Governing Council needed to be ready and prepared to ease the monetary policy stance further by adjusting all of its instruments.” Nonetheless, core European yields continued to rise further away from record low levels, dragged up by notable increases in U.K. yields. Ahead of this morning’s CPI report and crowded calendar of Fedspeak, the 2-year Treasury yield was 1 bps lower at 1.82% while the 10-year yield had risen 0.5 bps to 2.07%. Yields rose quickly on a firmer-than-expected CPI report.
Powell Sends Strong Signal in Support of an Ease: Fed Chair Powell’s answers to three particular questions from members of the House Financial Services Committee intensified the market’s dovish response to his prepared remarks released earlier in the day. Early in the session, Powell was asked if a strong June jobs report changed his near-term policy outlook. He replied “The straight answer to your question is no.” He expanded by calling the report “great news,” but said global growth had continued to disappoint and noted the presidential agreement at the G20 summit to restart trade talks, while “constructive,” didn’t “remove the uncertainty…weighing on the outlook.” His bottom line was “the uncertainties in global growth and trade continue to weigh on the outlook. In addition, inflation continues to be muted, and those things are still in place.” He was asked about Japan’s experience of moribund inflation in the face of a central bank balance sheet that now rivals the size of the country’s economic output. Powell said his “main takeaway” from Japan’s experience was that “it’s quite important that we fight at 2%, to keep inflation up to 2%, and use our tools to achieve that symmetrically.” An interesting exchange about the labor market started with a question about the risk of easing policy at a time when the labor market is hot and unemployment is near a 50-year low, the most commonly-cited reason for not adjusting rates lower. Powell responded, “We don’t have any basis, or any evidence for calling this a hot labor market.” He noted wage growth just north of 3% is good, but “barely covers” productivity and inflation and “certainly isn’t a high enough wage to put any upward pressure on inflation. …3.7% is a low unemployment rate, but to call something hot you need to see some heat.”
June Minutes Reaffirm Powell’s Dovish Message: Minutes from the Fed’s meeting last month showed the consensus belief that “uncertainties and downside risks surrounding the economic outlook had increased significantly” in the weeks leading up to the June meeting, and that the U.S. economy “appeared to have lost some momentum” since May. Many believed risks to the outlook had shifted “notably over recent weeks and…were now weighted to the downside,” and “nearly all” had lowered their dot-plotted path for the Fed Funds rate. In addition to concerns about trade policy and global growth, the assessment of business investment was weak and the Fed’s business contacts generally signaled a deteriorating outlook. Importantly, “many participants viewed the risks to the outlook for inflation as weighted to the downside.” A June rate cut was favored by only “a couple” of officials while the majority preferred to “monitor” incoming data for now because the increase in risks “was quite recent.” Still, many noted the case for easing “had strengthened” and “judged additional monetary policy accommodation would be warranted in the near term should these recent developments prove to be sustained and continue to weigh on the economic outlook.” Fear of an imminent recession was absent from a laundry list of possible reasons the Fed may cut rates soon, a list more consistent with the idea of providing insurance from “adverse shocks” and aiding inflation and inflation expectations back near 2%.
Bullard Believes Two Quarter-Point Cuts Would Give Economy Some “Insurance”: St. Louis Fed President Bullard, who currently votes on policy and dissented to leaving rates unchanged in June, said again that the December hike was an overreach and “overly preemptive” considering the recent low inflation trends. He said he doesn’t want to predict what the FOMC will choose to do later this month, but he personally believes the Fed should lower the target range by 25 bps this month and one more time before the end of the year. He called it “some ‘insurance’ against sharper U.S. slowdown,” that had been caused by trade uncertainties and concerns about global growth. A sequence of downward rate adjustments should also support inflation and inflation expectations.