Will September Bring the Fed's First Rate Cut Amidst Ambiguous Market Data?
Fear The Pivot
As has been the case throughout the past year, it’s the jobs market that’s helped pull investors out of the recession doldrums. Once again, the U.S. economy created more jobs than expected in April and that helped pull risk asset buyers into the market on Friday. While stock prices pushed higher on the idea that recession risk is still muted, it served to push interest rates higher again on the fear that already sticky inflation will continue to persist. As I noted earlier this week, the broader U.S. equity market has been trending lower since the beginning of April, as conditions had been suggesting could happen, but the strong labor market reading, a healthy services sector and a generally positive Q1 earnings season could balance out conditions and even turn them positive in the near-term.
Jerome Powell and the Fed did pretty much what the market expected them to this past week, which was deliver another quarter-point hike and give the markets the reassurance that the tightening cycle could be over (in terms of interest rates at least). With the economy still failing to meaningfully slow down, the central bank will likely shift its focus to balance sheet rundown as the next step. The futures market is pricing in September as the likeliest date for the first rate cut from the Fed, but it’s difficult to see that happening given the trend of the data. As long as job growth remains relatively robust, wage growth struggles to cool (average hourly earnings rose faster than expected again in April and core inflation stays stubbornly high, it’s tough to think that the Fed will be too eager to loosen conditions again with its ultimate goal of inflation control not yet achieved.
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