As Federal Reserve Chair Powell’s semiannual congressional testimony speech and the highly anticipated U.S. CPI data for June are about to appear this week, the issue of whether the Federal Reserve will cut interest rates in the third quarter will undoubtedly become the focus of attention of all parties in the industry in the next few days…
Last week, U.S. Treasury bonds ended the week strong, with the benchmark 10-year U.S. Treasury yield down about 20 basis points on the week, close to its lowest level since late June. At the same time, the U.S. stock S&P 500 index also gained its 34th closing high this year on Friday. It can be said that the stock and bond markets are currently showing a scene of “competing for beauty”. This scene was further highlighted after the non-farm payrolls data on Friday showed that the US labor market softened, as the data once again raised market expectations that the Federal Reserve will cut interest rates starting in September.
Data released by the U.S. Department of Labor on Friday showed that nonfarm payrolls increased by 206,000 in June, slightly higher than the 190,000 estimated by economists surveyed by the media, but nonfarm payrolls data for the previous two months were revised down significantly – new jobs in May From 272,000 down to 218,000, and new jobs in April were revised down from 165,000 to 108,000. In terms of unemployment rate, the unemployment rate in June also rose to 4.1%, higher than the expected 4.0%.
Recently, in the Fed’s debate over when to start cutting interest rates from near 20-year highs, the labor market has been a key focus, and a series of data over the past few weeks suggests that labor market changes have begun to move more in favor of the Fed cutting rates in the second half.
“This is not a bad report, but the big revisions in the previous months still show cracks and weaknesses underneath,” said David Wagner, portfolio manager at Aptus Capital Advisors. “This makes it possible for the Fed to cut interest rates at the September meeting. “
Gregory Faranello, head of US rates trading and strategy at AmeriVet Securities, also said, “This is actually a data that is favorable to the Treasury market, and the Fed will be very alert to the performance of the labor market.”
Data from the derivatives market shows that traders have further increased their bets on rate cuts after the release of the non-farm payrolls data. They currently have the probability of two rate cuts this year again reaching 100%, while believing that the probability of Powell and his colleagues cutting rates as early as September It’s about 76%.
Is the Fed about to build momentum for a rate cut?
In a sense, if the Fed really wants to build momentum for a rate cut in September, then from now until next month’s Jackson Hole central bank annual meeting, it may be the best “preparation node”. Powell’s two consecutive testimonies on Capitol Hill on Tuesday and Wednesday this week and the US CPI data for June on Thursday are likely to further affect the market’s expectations for rate cuts.
Many industry experts expect Powell to face tougher questioning from lawmakers this week, explaining why the Fed is reluctant to lower borrowing costs.
Earlier, the Fed released its “Monetary Policy Report” for the first half of 2024 on its website on Friday. The Fed outlined its assessment of the current state of the US economy, emphasizing the necessity and importance of its policy independence in the context of easing inflation. The report also argues that the interest rate range will not be adjusted easily until sufficient confidence is gained that inflation will return to the 2% target. Monetary policy decisions will continue to be based on data, economic outlook and risk balance.
However, Powell’s recent speeches in some public places have gradually revealed a relatively dovish side. For example, at the Sintra Annual Forum hosted by the European Central Bank last Tuesday, Powell still refused to give any specific guidance on the timing of the first rate cut, but also made it clear that the Federal Reserve has made considerable progress in bringing inflation back to its policy target.
Powell said, “Recent (inflation) data, and to a somewhat lesser extent the previous one, suggest that we are back on the path to lower inflation. . . Before we start easing (monetary) policy, we want to be more confident that inflation is continuing to decline and approaching 2%.” Jeff Klingelhofer, co-head of investments at Thornburg Investment Management, said, “I think there is still room for Treasury bonds to rise. Powell’s recent remarks show that he is inclined to initiate a moderate easing cycle. labor market It is returning to a better balance, inflation faces downside risks, and the economy may slip into recession.”
In addition to Powell’s two testimonies, it is also worth noting whether the US CPI data this week can bring more good news. The current industry survey generally expects that the annual rate of overall CPI in the US in June will fall from 3.3% in the previous value to 3.1%, while the monthly rate is likely to rise to 0.1%; the annual rate and monthly rate of core CPI will remain at 3.4% and 0.2%, respectively.
Stephen Juneau, an economist at Bank of America, wrote in the CPI forward-looking report, “We expect that after May’s impeccable CPI report, the June CPI report will further enhance people’s confidence (in the decline in inflation).”