Cable FX Macro:
I fear some market participants and desks may miss the bigger picture. Currently, the VIX stands below 12.0%, a 1 vol drop MTD, tracks around 50bs of decline YTD. Risk assets continue to rally, the U.S. equity benchmark is leading major indexes holding to gains of 14% this year
We know Powell is sensitive to markets, we have seen him react before. The Federal Reserve is not using its volatility suppression function because it doesn't need to, no wonder why they feel free to pencil one rate cut (despite unemployment above 4% and PCE in line with its prior trend)
Ahead, we will be digesting data in the form of industrial production, consumer sentiment surveys, retail sales, and PCE deflator. How these indicators play out will determine whether markets continue to fight the Fed or not, swaps price in around 46bps of easing by end of year
UBS:
Fed's higher inflation forecast causes it o shift from three cuts to one this year. It remains possible there'll be none in 2024 as the Fed still sees a positive output gap
Fed worried that cutting will cause a sharp loosening of financial conditions
Treasury yields overreacted to CPI and should correct back up. Equities should interpret the Fed as a good message since it has no interest in harming growth
Some think the bar for the Fed to cut is high because the FOMC projects a 2.8% core PCE in 2024, which implies an average of 18bp PCE per month. But if you look at core PCE in 2023, it averaged 16bp in 2H
ING:
More evidence of inflation pressures easing. If we can get two or three more 0.2% core inflation prints in quick succession that will be a necessary, but not a sufficient factor that leads to a rate cut.
More evidence of labour market slack. The unemployment rate has gone from 3.4% to 4.0%. If that moves convincingly above 4% with more evidence of a cooling of wages this too will help swing the argument in favour of rate cuts.
Softening consumer spending. It's the primary growth engine in the US and there was some evidence of that softening in 1Q GDP revisions and weak April spending data, but the Fed needs to see more. Flat real household disposable income growth, the exhaustion of pandemic-era accrued savings for millions of households and rising loan delinquencies suggest financial stress is materialising for many lower-income families, and this will indeed see a cooling in spending.
If we get all three of these, we believe the Fed will indeed seek to move monetary policy from “restrictive” to “slightly less restrictive” with 25bp rate cuts at the September, November and December FOMC meetings.
Barclays:
As we had expected, the new Summary of Economic Projections (SEP) was somewhat hawkish, showing a median of only one 25bp rate cut this year. This came despite a surprisingly weak May CPI inflation print. FOMC participants also lifted their longer-run dot to 2.75%.
Core CPI surprised to the downside in May, printing at 0.16% m/m (3.5% y/y), led by a sharp slowing in core services, some of which came from volatile categories. After taking today's print onboard, our core CPI forecast for December 2024 is lower by 0.1pp, at 3.2% y/y for December 2024
TD:
The Fed is still planning to cut rates in 2024. While the median Fed dot only points to 25 basis points in cuts this year (vs 75 bps in March), investors were concerned whether the Fed was still prepared to cut at all. The upturn in inflation over the first few months of 2024 has caused the Fed to proceed more cautiously. There are 8 members of the FOMC that think 50 bps in cuts will be warranted by end-2024, while 7 are expecting 25 bps, and 4 foresee no cuts at all. This is a big departure from just three months ago, when most members were expecting three cuts this year.
with today's CPI report substantiating that view, the bar has been raised for the Fed. This has markets lowering the odds of a September rate cut. As of writing, the market is no longer priced for two full 25 bps cuts this year – leaning more towards the median of the FOMC. We'd agree with that. We recently pulled back the timing of rate cuts, as economic growth and inflation have yet to convincingly provide the Fed with enough evidence that cuts are warranted.
Morgan Stanley:
Fed is generally in line. Maybe a bit disappointment relative to CPI release, which they didn't have before dots were constructed. I think we are on a downward trajectory at this point given the lag with M2 growth. However, I think they may be surprised on the growth front, where data ha been weaker this year.
Commerzbank:
Powell emphasized that the Fed would decide on key interest rates from meeting to meeting and that this would depend on the data. Above all, the Fed must gain the necessary confidence that inflation is on the way to the 2% target. The figures published today on consumer prices in May, which were better than expected by the consensus, would at least contribute to this. However, one should not place too much emphasis on a single data point.
We see this as confirmation of our long-held view that the Fed is approaching the first interest rate cut very cautiously. The Fed obviously wants to avoid cutting too early and then having to change course again. Our forecast of a first rate cut in December therefore still seems plausible to us.
Natixis:
The Fed kept rates on hold, as expected, and not much was learned about the Fed’s reaction function at the June FOMC meeting. This is still a Fed that is prioritizing inflation and will not take just one or two encouraging inflation prints as sufficient evidence that enough progress is being made. The Summary of Economic Projections now sees one 25 bp cut this year compared to three in March but only raised their 2025 rate projection by 25 bp to 4.125%. We think we will see disinflation continue, and we maintain our call that the first cut will come in September
Rabobank:
While markets focused on the strong establishment survey data in the Employment Report on Friday, with nonfarm payroll growth rebounding to 272K and average hourly earnings growth rising to 4.1% in May, the household survey actually showed a further rise in the unemployment rate to 4.0% in May from 3.9% in April. This means that we remain close to triggering the Sahm rule with the recession-indicator reaching 0.37 in April and May. If this indicator reaches the 0.5 threshold, a recession should have started.
Looking further ahead, we find the 4 rate cuts per year projected for 2025 and 2026 unrealistic. Assuming that Trump wins the elections and imposes a universal tariff, a rebound in inflation is unavoidable. This would halt any cutting cycle by the Fed in its tracks. We still expect only two rate cuts for 2025, in the first half of the year. Once inflation rebounds, the window of opportunity for rate cuts closes
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