Expecting No Rate Cuts, Just Change in Words - Market Outlook from QuanTimer for June 19, 2019

Federal Reserve’s Dual Mandate
We have already explained the Fed’s dual mandate in an earlier post.

Since the Fed has always maintained its policy of data-dependency, let’s look at the data carefully.

Nonfarm Payrolls
US nonfarm payrolls added 75,000 jobs in May, well below the consensus of $185,000. The prior two months were revised downward by a total of 75,000.


Nonfarm Payrolls – June 2015 – May 2019.
Source: US Bureau of Labor Statistics. chart @Tradingeconomics

There’s no doubt that the job creation in the US has slowed since March. On the other hand, the unemployment rate was unchanged in May at 3.6%, the lowest since 1969. Also, we should not forget that the nonfarm payrolls number is a coincident indicator, and it can turn the corner next month. When combined with the unemployment rate, it is hard to argue in favor of a rate cut.

Producer Price Index
The Producer Price Index (PPI) increased 0.1% in May, and is up 1.8% over the past year. It is down from last month’s 2.2%. The core rate, excluding food and energy is up 2.2% YoY. This is a notch above the Fed’s 2% target rate.

Consumer Price Index
The consumer price index (CPI) rose 0.1% in May and 1.8% over the past year. The core rate increased 0.1% for the month and 2.0% YoY.

Conclusion
Both PPI and CPI came in right around the Fed’s target. The Fed has already indicated that it will soon end its balance sheet reduction program, which will be essentially the end of its tightening monetary policy. The preponderance of data suggests that there should no urgency for a rate cut. What has complicated the matter is the trade war and the global slowdown. We expect the Fed to hold the rate, but change the words of the statement. The statement will be dovish. Most likely, the word ‘patient’ will be replaced by ‘closely monitoring’ or something of that nature. Essentially Jerome Powell will join ECB President Mario Draghi who said yesterday that ECB would be ready with stimulus if needed.

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