By Mark DeCambre, MarketWatch
All eyes on Fed Chairman Jerome Powell on Wednesday
The first cut is the deepest.
Clamoring for a rate cut -- the first in more than a decade --
by the Federal Reserve at some point this year is running hot.
A survey by the Wall Street Journal earlier in the week signaled
that nearly 40% of economists (paywall)
(https://www.wsj.com/articles/wsj-survey-most-economists-say-fed-s-next-move-is-rate-cut-11560434400)
polled by the publication expect the U.S. central bank to ease
monetary policy next month.
The chief economist Joe Davis of Vanguard, the fund provider
that manages some $5.4 trillion of wealth, speculated that an
"insurance" rate cut by Jerome Powell's Fed
(https://www.reuters.com/article/us-usa-fed-vanguard/fed-will-make-insurance-rate-cut-as-early-as-next-week-vanguard-idUSKCN1TE2EY)
could arrive as early as Wednesday, at the conclusion of the
central bank's two-day policy gathering that kicks off June 18.
Federal-funds futures pointed to an 87% chance for a July cut and
26% chance for an easing this month, as of late Friday, CME Group
data show
(https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html).
But what if Wall Street is stone-cold wrong about the Fed
cutting, or even communicating its intent to reduce benchmarks
rates, which currently stand a range between 2.25%-2.50%, in coming
meetings?
Check out:The market is terrible at predicting Federal Reserve
interest-rate moves, chart shows
(http://www.marketwatch.com/story/the-market-is-terrible-at-predicting-federal-reserve-interest-rate-moves-chart-shows-2019-06-06)
Kathy Bostjancic, chief U.S. financial economist at Oxford
Economics, told MarketWatch that the domestic economy hasn't
weakened sufficiently to justify dialing back rates.
"The Fed might not be prepared to confirm such validations given
the hard data do not yet signal a sharp slowdown in economic
activity," she said.
May's woeful employment report from the Labor Department, with
just 75,000 jobs created on the month
(http://www.marketwatch.com/story/us-creates-just-75000-jobs-in-may-and-wage-growth-slows-in-warning-sign-for-economy-2019-06-07),
compared with expectations for 185,000, is often cited as evidence
of cracks forming in the economy, which is set to mark at the end
of this month a record for the length
(http://www.marketwatch.com/story/can-trumps-trade-tussle-sink-a-chance-at-the-longest-economic-expansion-in-history-2019-06-01).
Read: Business conditions are at their worst level since the
2008 financial crisis, says Morgan Stanley
(http://www.marketwatch.com/story/business-conditions-are-at-their-worst-level-since-the-2008-financial-crisis-says-morgan-stanley-2019-06-14)
However, other data have been relatively healthy if failing to
dazzle. A measure of retail sales activity indicated that
persistent talk of the demise of the U.S. consumer is overstated.
U.S. retail sales gauged by the Commerce Department
(http://www.marketwatch.com/story/retail-sales-look-strong-with-a-solid-gain-in-may-and-an-upward-revision-to-prior-month-2019-06-14)
increased 0.5% in May, slightly below expectations of 0.7%, while
the reading for April sales was raised to a 0.3% gain from the
initial report of a 0.2% fall.
The University of Michigan's consumer-sentiment index came in at
97.9 in early June, down from a seasonally adjusted 100 in May but
slightly higher than estimates for 97.3, and a measure of
industrial production rose 0.4% in May, representing its strongest
monthly rise in six months, helped by increased production of
pickup trucks and cars.
Those reports don't immediately scream out for a pre-emptive
rate cut, some strategists argue.
However, the data do pose a conundrum for the Fed, which must
weigh lowering rates--off already low levels--to curtail the effect
of a protracted Sino-American trade conflict even as data remain
relatively stable--at least for now. To be sure, the corporate
chieftains say trade-war worries are forcing them
(http://www.marketwatch.com/story/broadcom-slaps-down-hopes-for-a-second-half-rebound-in-chips-2019-06-13)
to rethink their business strategies.
That all sets the stage for a possible disappointment for a
market that is pining for rate cuts, betting that the trade
friction between the U.S. and China could yield a more dovish, or
accommodative, posture from U.S. monetary policy makers, with the
10-year Treasury note closing at a paltry 2.093% on Friday, while
the S&P 500 is off a mere 2% from its April 30 record and the
Dow Jones Industrial Average is about 2.8% shy of its Oct. 3
all-time high, while the Nasdaq Composite indexes was about 4.5%
off its 52-week high. That is notable because the Nasdaq slipped
into correction territory, commonly defined as a 10% drop from a
recent peak, about two weeks ago.
Read: MarketWatch's snapshot of the market
(http://www.marketwatch.com/story/stock-index-futures-edge-lower-after-weak-china-data-2019-06-14)
The fact that assets perceived as risky like stocks, and bond
prices, which move inversely to their yields, are climbing in
tandem (and gold is flirting with 14-month high
(http://www.marketwatch.com/story/gold-blasts-higher-as-investors-seek-shelter-from-geopolitical-tensions-2019-06-14)),
underscores the unusual and confusing state of affairs for
investors.
On top of that, inflation is stubbornly low, the Univ. of Mich.
survey showed that consumers expect annual inflation to average
2.2% over the next five years, down from expectations in May of a
2.6%.
However, the Fed's preferred measures of inflation,
personal-consumption expenditures, or PCE, rose 1.5% in April from
a year earlier and has been consistently running below the Powell
& Co.'s 2% annual inflation target, with the Wall Street
Journal reporting that weak inflation data
(https://www.wsj.com/articles/derbys-take-a-roundup-of-inflation-data-finds-little-to-like-for-the-fed-11560504601?&mod=article_inline)
are part of the mix of factors that may ultimately compel a Fed
rate cut.
Thomas di Galoma, managing director and head of Treasury trading
at Seaport Global Holdings, told MarketWatch that bonds and stocks,
which have both been rallying on rate-cut expectations could
tumble.
"I think there could be a real disappointment with the Fed's
message as 10-year rates have fallen 45 [basis points] in the last
30 days the market could set itself up for a yield selloff," he
said.
Either way, Kristina Hooper, chief global market strategist at
Invesco, said the June Fed meeting will be a crucial point for
setting the tone for the markets.
"All eyes will be on this Fed meeting--especially the statement
and the dot plot," she said, referring to the plot of rate
expectations by the members of the Federal Open Market
Committee.
"In other words, this Fed meeting is very important because
market expectations have gotten so dovish recently," Hooper said.
"And with risks rising, many investors recognize that once again
the Fed stands between it and a more trying stock market
environment."
She said the Fed will "definitely want to see some movement
toward more dovishness," adding, "I think markets are expecting to
at least see the removal of the 'patient' language from the Fed
statement
(https://www.cnbc.com/2019/06/14/fed-rate-cut-could-come-sooner-than-some-expect-but-not-yet.html)."
The Invesco strategist said if the market doesn't get what it
wants--watch out!
"If they don't see a strong willingness to move toward more
accommodation, they will likely register their disappointment in a
stock selloff."
Di Galoma put it this way: "Bottom-line is the Fed has to walk a
tight-rope on their market message and achieve some stability. Lets
just say they have a very difficult job at this point."
Looking ahead
Beyond the Fed decision due at 2 p.m. Eastern Time Wednesday and
Powell's news conference a half-hour later, investors are looking
out for a few other data points, including the debut of enterprise
software company Slack Technologies.
Monday
A reading of manufacturing conditions in the New York state
area, the Empire State manufacturing survey, will be released 8:30
a.m., following by the Housing market index at 10 a.m.
Tuesday
A report on housing starts for May will be released on
Tuesday.
Thursday
Jobless claims and the Philadelphia Fed Business Outlook at 8:30
a.m.
Slack is set to make its debut in a direct listing on the New
York Stock Exchange
Friday
A reading of existing-home sales will be released at 10 a.m.
A pair of central bank speakers, Federal Reserve President
Loretta Mester and Fed Gov. Lael Brainard, will deliver remarks
during a discussion of community development and the economy.
Cleveland at 12 p.m. in Ohio.
(END) Dow Jones Newswires
June 17, 2019 12:04 ET (16:04 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.