The Market Today

Record Decline for Empire Fed Index Kicks Off FOMC Week

by Craig Dismuke, Dudley Carter


FOMC Meeting a Test of Fed’s Patience Amidst Perceived Need for Accommodation: This week’s economic calendar will include several reports on housing and the regional Fed surveys from New York and Philadelphia.  Much more importantly, however, will be Wednesday’s FOMC decision.  Coming into the decision, trade talks have broken down with China, inflation has proven much softer than expected, and inflation expectations have dropped.  As a result, the markets are expecting the Fed to ease policy this year, although there is not much conviction that the first cut will be this week.  Rather, Fed Funds Futures contracts show that investors expect a cut at the Fed’s July meeting (92% likelihood) followed by at least one more cut later in the year.

Our outlook now includes an expectation for two rate cuts this year for four reasons: 1) trade discussions have dragged on longer and become more contentious than expected,  2) trade uncertainty is affecting U.S. and global activity, 3) inflation has missed the Fed’s 2% target by a surprisingly large margin, and 4) the markets are likely to interpret inaction from the Fed as a sign that they are tone deaf (similar to the December market reaction).  If the FOMC does not cut this week, they will need to at least show a willingness to cut which is likely to include changes to the infamous Dot Plot.  We expect a few officials to show an expectation for a rate cut this year, the median expectation to no longer project a rate hike in 2020, and the longer-run neutral rate to drop further (see Chart of the Day).

Empire Fed Index – Manufacturing Data Shows More Signs of Weakness: The June Empire Fed Manufacturing index showed yet another sign that trade is weighing on manufacturing sentiment and activity.  The index posted a record decline from +17.8 to -8.6, a 26.4 point drop in just one month.  Driving the decline was a 19.7-point decline in the new orders to index taking the key metric into negative territory for the first time in two years.  Also falling into negative territory were the indices tracking number of employees, average workweek, inventories, unfilled orders, and delivery times.


Overnight – U.S. Yields and Equity Futures Tick Higher to Start Fed Week: U.S. assets opened Monday with a slight-risk on bias as investors anxiously await the Fed’s Wednesday policy announcement that will be accompanied by refreshed projections and comments from Chair Powell. Equities across Asia and Europe were generally weaker but U.S. futures were trading just into positive territory around 7:30 a.m. CT. Global bond yields, however, have made a synchronized move to the upside, although the record drop in the Empire Manufacturing index pulled Treasury yields off their highs. Treasury yields were essentially unchanged last week as the combination of solid economic confidence metrics, solid retail sales, and steady industrial production challenged the market’s expectations for a steep cut in the Fed Funds rate by the end of the year. However, another weak inflation report gives the Fed heavy cover fire to sound more cautious. The 2-year year Treasury yield was 1.8 bps higher just after 7:30 a.m. CT at 1.86%, while the 10-year yield had added 1.0 bps to 2.09%. In addition to the Fed, central banks in England and Japan will announce decisions this week. The Dollar rallied Friday on the stronger retail sales data but pulled back overnight. Oil prices were lower Monday after tanker attacks last week escalated tensions in the Middle East, with WTI trading down around 1% to $52 per barrel and near its lowest level of the year.


ICYMI – June 14, 2019 Weekly Market Recap: Yields ended last week essentially unchanged as a couple of solid-to-strong economic metrics gave markets reason to second guess their expectations for imminently easier Fed policy. However, another weak consumer inflation report reinforced the market’s broader belief that Fed policy is a bit too tight for the current economic environment, one plagued by a persistent uncertainty around global trade. Click here to view the full recap.

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