Markets are still interpreting comments from NY @federalreserve Pres. John Williams as being indicative of dovish #Fed policy action, despite the central bank’s defense that these comments stemmed from long-term research. We think the #market is right to price in easing.
The central bank is considering significant #easing, but recent strength in June payrolls, and the bounce back in goods pricing in the last #CPI, suggest that it is not solely U.S. weakness driving the narrative, but preventive action based on fear of global slowing.
In line with our view that a rate cut is likely, we would point out that even with the decent Core #CPI number, Core #PCE is projected to be just under 1.7%, which is still well below Fed target.
Further, many other #economic indicators point to greater #uncertainty for the outlook: indeed, U.S. Manufacturing ISM has decelerated dramatically from 60.8 in August 2018 to 51.7 in June 2019, its lowest print since 2016…
U.S. @ism Prices Paid decelerated from 79.5 in May 2018 to 47.9 in June 2019, and U.S. ISM New Orders decelerated from 67.3 in December 2017 to 50.0 in June 2019, illustrating both a broad-based slowing of #growth and heightened uncertainty about its future path.
As Chair #Powell has repeatedly said, maintaining the economic expansion is a top priority for the #FOMC: a 50 bps cut is still quite possible.
In fact, markets have been recently pricing in a meaningful monetary policy accommodation cycle from many of the world’s central banks, so if the #Fed were not to move, it would likely shock #markets, and undermine a good amount of the global easing expected in the year ahead.
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There are some jobs reports over the years that are acutely followed by markets and others that are more of an afterthought. Today’s was the former, and the market reaction casts no doubt on the employment data’s importance. We can see the market's focus shifting from inflation to labor market data in the term-premia being priced around important data releases. It is clear that the labor market data has now overtaken inflation as the most important focus for both markets and the Federal Reserve.
While the recent labor market data is clearly softer, it is very far from a disastrous indicator of recession, hard-landing, or some pernicious foreshadowing of future consumer weakness. Rather, we continue to believe the job market is moderating from robust post-COVID demand. In fact, almost none of the recent increase in unemployment has been permanent job losers; rather, it was driven by temporary (weather-related) layoffs in August, which reversed this month, and a steady stream of new entrants.
So, while last month’s print famously triggered the Sahm rule, thus sending markets into a frenzy by hinting at the idea that a recession is nigh, we remain firmly in the camp that the data is that of a moderating economy, rather than a one headed towards recession. Even in today’s softer payrolls report, we see that job destruction is nowhere near the typical rate seen at the onset of recessionary periods.
In his conference speech today @federalreserve Chair Powell delivered a jumping off point for a shift in monetary policy that would start to bring the Fed Funds rate down at the next FOMC meeting in a couple of weeks.
Specifically, his description of a more balanced economic condition, which has largely normalized and is consistent with pre-Covid growth and inflation levels, sets the stage for such a change in policy.
The Fed has been waiting to gain more confidence in those parameters being in place, and today’s comments suggest that the time has come, as the Chair explicitly stated.
CIO Charts of the Week: We believe the recent return of chaotic markets likely has its origins in onerously tight policy, which has created increased vulnerability to crowded positioning and stretched valuations for risk.
With the benefit of hindsight, we would note that the first foreshadowing of fragility may have been SOFR spiking on July 2.
Shortly thereafter, the US Tech sector, which had risen to >20% above its 200d moving average, reversed dramatically on the largest ever 1-week small cap > tech outperformance!
Next, an earlier-than-expected Bank of Japan hike in policy rate set off a +5 standard deviation move in the Japanese Yen as investors rushed to close this popular carry trade.
Today’s CPI report confirms a trend that has been in place for a number of months: inflation moderating to a more normalized run rate level of price gains, and one that should continue to build confidence for the @federalreserve that this part of its mandate has been durably tamed.
Therefore, we think today’s and other recent data open the door for a September beginning of a rate cutting cycle.
Today’s core CPI reading of 0.17% month-over-month and 3.17% year-over-year was relatively close to the market’s expectations, and continues to depict a slowing of inflation, particularly in apparel and used cars and trucks.
A Deep Dive on Recent Data: While headline CPI data printed at -0.06% month-over-month and Core CPI printed at 0.06%, the real story of today’s CPI print lies in the services components. June represented another month of very low Core Services (ex-Shelter) readings, which has completely reversed the acceleration seen in the 1st quarter, and is now under the Fed’s 2% inflation target on a 3-month annualized basis 1/
Earlier this week @federalreserve Chair Powell delivered testimony before Congress that underscored the progress that’s been made in both bringing labor markets into better balance after the severe pandemic-era disruptions, and improvements achieved in taming the high inflation rates of that period as well- a narrative which today’s data continues to support. 2/
Looking at other inflation metrics, the Fed’s favored measure of inflation, core PCE, increased 0.08% in May, bringing the year-over-year figure for the measure to 2.57%, as of that month, while the @DallasFed’s trimmed mean measure of PCE inflation, printed at 2.79% year-over-year in May. 3/
In a market that’s become obsessed with election results and the question of who will take on the job of leading some of the largest developed market countries, such as the U.S., France, and the U.K., last Friday we had a day of respite to focus on the broader employment picture for the U.S.
What that #JobsReport showed us was that while political officials seem to be extremely focused on their own employment prospects, there is a very gradual, but persistent, moderation within the broader employment picture.
After a stronger than expected May report that seemed to contradict some slowing in other employment indicators, such as the JOLTS, ISM, Claims, and ADP data, this recent report depicted what appears to be a more consistent trend of slowing, while still decent, labor demand.