Fed Chair J. Powell’s opening conference remarks on June 4 reassured the public that the Fed “will act as appropriate to sustain the expansion”. The remark was interpreted by market participants as a dovish turn, supporting the market’s pivot to an increased chance of a rate cut rather than rate hike for 2019. The Fed was hawkish at the end of 2018, with the dot plot indicating expectations of 2 rate hikes for 2019. However, in Powell’s words, expectations only provide guidance if the economy moves in the “least unlikely” scenario. We have not been moving in the least unlikely scenario. In the past, the Fed expressed the desire to avoid inverting the yield curve, a common (though sometimes unreliable) pre-recession indicator. Parts of the yield curve are already inverted, with the 1 month yield higher than the 10-year yield, and a cut would attempt to push down these short-term yields.
ISM and PMI Manufacturing Indices both signaled a manufacturing sector that is slowing but still growing. Both indices last peaked in August 2018 and since have trended downward, well before the recent trade disputes. Construction spending echoes this sentiment, peaking at the same time, falling since, and currently flat for last month. Hiring and wage inflation for May were positive but lower than expected; with an unemployment rate at 3.6%, the pool of available workers is limited. The Q1 GDP estimate is at 3.1%, but recent indicators are not pointing to an economy capable of producing comparable numbers for Q2. However, the economy is still growing at a modestly positive rate, supported by May’s Beige book, and not pointing to negative growth (contraction).
Despite the lack of better-than-expected indicators, the S&P 500 gained over 4% last week, primarily due to Powell’s comments and the market expectations of a coming rate cut. The US-Mexico trade dispute appears to be winding down, with Mexico agreeing to step up its immigration enforcement efforts and the US indefinitely suspending the initially proposed 5% tariffs. As a result, NAFTA has been renegotiated with the new trade deal dubbed United States-Mexico-Canada Agreement (USMCA), pending ratification. The US-China dispute still lingers but the apparent end to the US-Mexico dispute should remove some uncertainty and be a positive for markets.
Industrial production and business inventories indicators will be released this week on the latest business activity. This week’s inflation indicators include PPI and CPI that may influence coming Fed policy. Retail sales and consumer sentiment will be released Friday to close out the week.
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