The driver for this week’s equity trading narrative will continue to be expectations for the Federal Reserve to accommodate investors with an interest rate cut at the next FOMC meeting. Last week’s release of the June Employment Report did little to support the need for any immediate action on the part of the Fed. The previous week’s headline news that trade talks between the US and China will resume also provided the Fed with a degree of room to step back from any near-term move on rates. Uneven economic data in the form of housing, and yield curve inversion, not to mention dramatically compressed yields, however, continue to speak to a need for accommodation.
June employment gains were significantly stronger than expected. Econoday consensus was calling for a gain of 165k. The actual results were 224k. Additionally, private payrolls expanded by 191k, manufacturing payrolls rose by 17k, and the Labor Force Participation ticked up to 62.9% from 62.8%. The report triggered a brief intraday selloff in US equities on Friday. The Dow fell 200 points in the immediate aftermath of the release, only to rally and register modest losses for the session.
The report was precisely what investors looking for a cut in interest rates by the Fed were not expecting. Stronger than expected economic data runs counter to the thesis that a softening US economic landscape needs accommodation. Stronger than expected economic data is likely to push any move by the Fed further into the calendar year.
Certainly, if accommodation is the driver of rising equity prices in recent weeks, any delay in the expected accommodation acts as a drag on prices.
May’s monthly employment figures, revised in the June report, dipped to 72k from the initial reading of 75k. In either case, the May set up for June was misdirectional. Another issue for those looking for accommodation comes in the average hourly earnings (AHE) data in the June report. May’s AHE were revised up to 3.2% from the initial 3.1% reading. June’s AHE were 3.1% versus a consensus of 3.2%. Wages have remained strong. Employment remains strong, with the unemployment rate standing at 3.7%.
In short, a cut in rates in Q3 is not a forgone conclusion. It will be interesting to see how Q2 earnings inform the monetary policy narrative in the coming weeks and months. Q2 earnings season gets underway this week. Delta, Pepsi, and Levi report. Financials begin reporting next week.
The week’s Economic Calendar in Focus:
Tuesday, Wednesday, and Thursday, Fed Chair Powell is scheduled to speak. It is a near-conclusion that, at this stage of the cycle—and given the primacy of the monetary policy conversation across all markets—he will provide a degree of clarity regarding what the Fed is looking for from the economy in coming quarters relative to any easing. In so doing, the street will attempt to game the timeline on the initial rate cut.
On Wednesday, the EIA Petroleum status report, as well as the FOMC Minutes, will be released from the last meeting. The FOMC Minutes will be of particular interest given the backdrop of the Chair’s speeches.
On Friday, the PPI-FD data for June will be released by the Bureau of Labor Statistics. Econoday consensus is unchanged from May, 0.1%. Y/Y, Econoday consensus is 1.7%.
Marc Sutin’s Market Analysis Comment–
Monday July 8, 2019
The Bond Market Needs Your Attention
Defining the Battle to Break the Secular Downtrend in Yields
Fundamental Underpinnings of the Secular Decline in Yields
A Deep Dive into the Chart of the US 10-Year T-Note Yield
The US 10-Year T-Note Yield May Be Losing Its Battle to Break A
Secular Downtrend