Powell Congressional Testimony and June CPI in Spotlight
With the solid June jobs report from last Friday, Fed Chair Powell’s two-day congressional testimony takes on added significance. He’ll be speaking Wednesday to the House Financial Services Committee and Thursday to the Senate Banking Committee. While there was a kneejerk reduction in rate-cutting odds after the jobs report it subsequently moved back to 100%. If Powell is uncomfortable with the markets’ outlook the hearings provide the perfect venue to raise those concerns. If he doesn’t that is an answer too. The big economic release will be the June CPI reading on Thursday and a beat of expectations could muddy the water some for a July rate cut, but probably not enough to kill it. An as-expected, or weaker-than-expected, reading seals the deal for a 25bps cut.
|Treasury Curve||Today||Week Change|
|3 Mo LIBOR||2.31%|
|6 Mo LIBOR||2.21%|
|12 Mo LIBOR||2.19%|
|Date||Statistic||For||Briefing Forecast||Market Expects||Prior|
|July 9||NFIB Small Business Optimism||June||103.0||103.3||105.0|
|July 10||FOMC Meeting Minutes||Jun 10||NA||NA||NA|
|July 10&11||Powell Congressional Testimony||Jul 11||NA||NA||NA|
|July 11||CPI (MoM)||June||0.0%||0.0%||0.1%|
|July 11||Core CPI (MoM)||June||0.2%||0.2%||0.1%|
|July 11||CPI (YoY)||June||1.6%||1.6%||1.8%|
|July 11||Core CPI (YoY)||June||2.0%||2.0%||2.0%|
|July 12||PPI (MoM)||June||0.1%||0.1%||0.1%|
|July 12||Core PPI (MoM)||June||0.2%||0.2%||0.2%|
Top 5 Events for the Week
July 8 - 12, 2019
1. Powell Testimony & FOMC Minutes – Wed./Thurs.
2. Trade-Related News – All Week
3. June Inflation Readings – Thursday/Friday
4. June NFIB Small Biz Optimism – Tuesday
5. Treasury Funding – Wednesday
1. Fed Chair Powell Testimony & FOMC Minutes — Wednesday/Thursday
With the solid June jobs report from last Friday, Fed Chair Powell’s two-day congressional testimony takes on added significance. He’ll be speaking Wednesday to the House Financial Services Committee and Thursday to the Senate Banking Committee. With some steam taken out of the camp expecting a July rate cut following the stronger-than-expected jobs report, Powell’s comments will be analyzed for hints regarding the Fed’s rate cutting posture for the July 31 FOMC meeting. While the jobs report was solid in most respects, wage gains missed expectations and appear to be plateauing around 3.0% -3.1% YoY which is off from the cycle high of 3.4% earlier this year. The lack of accelerating wage gains, and muted inflation readings, give the Fed the freedom to take back the December rate hike if they so desire. Powell’s talk this week may give us some clues on how they are leaning. The minutes from the June FOMC meeting on Wednesday will be reviewed for indications of rate-cutting bias but with the jobs report in hand, and Powell’s real-time testimony the minutes now hold less relevance.
2. Trade-Related News - All Week
While Powell’s testimony will take the spotlight this week, and to a degree the June CPI report, any additional trade-related headlines will influence the rate-cutting odds as well. If President Trump is serious about a rate cut, and we certainly think he is, he might want to play hardball on Chinese negotiations until after the July 31 FOMC meeting. Any good news on those talks/negotiations will only work to lower the odds further of a rate cut while tough talk and/or bad news from the negotiations increases uncertainty and that will help the rate-cutting case. Does the White House work in such Machiavellian ways? We think they do and so we wouldn’t be surprised to see some headlines indicating talks are in trouble, etc..
3. June Inflation Readings – Thursday/Friday
After June’s solid jobs report there was a kneejerk decrease in odds that the Fed will cut rates later this month but those returned to the 100% level after cooler heads prevailed. In any event the June CPI readings on Thursday could either muddy the water some more for a July rate cut, or seal the deal for a cut. Expectations are for overall CPI to be flat versus a 0.1% increase in May. The core rate (ex-food and energy) is expected to increase 0.2% which would break a string of four straight months with a 0.1% gain. All those months had expectations of 0.2% too so will June break the string or make it five straight months at 0.1%? On a year-over-year basis, CPI is expected to decrease 2/10th to 1.6% while core CPI YoY is expected to remain unchanged at 2.0%. The Fed’s preferred inflation measure, core PCE, remains under 2% at 1.6%. The trend for PCE is to run about 30bps below CPI so with core CPI expected at 2.0% that implies core PCE increasing slightly to 1.7% but still below the 2.0% target. If the report comes as expected, or weaker, it gives the Fed latitude to cut rates at the July meeting while a stronger reading, combined with the strong jobs report, could muddy the waters some but probably not enough to kill the cut.
4. June NFIB Small Business Optimism – Tuesday
Trade war-related angst took some steam out of the NFIB Small Business Optimism readings earlier this year with the index dipping to the 101 level from a 108 high back in August. The May report bounced to 105 while expectations for June are around 103. Many small businesses complained about additional costs stemming from tariffs and that fed some of the decline in optimism so with some cooling of trade-related rhetoric it wouldn’t be surprising to see the May bounce sustained in June. If optimism continues hold above 100 that could bode well for future job gains.
The U.S. Treasury returns to the market this week with new 3-year issuance and re-openings of the on-the-run 10-year note and 30-year bond. With the jobs report-inspired back-up in yields last Friday it makes a deeper concession less likely but with the odds of a July rate cut taking a small hit initially but then recovering from 96.5% odds back to 100% there may be some lingering anxiousness which could inhibit auction bidding. Recent auctions have generally been well-received even as we’ve hit or approached yield lows so it will be interesting to see if this trend continues even with the strong jobs report in hand.
Investment Yield Ranges Over Last Year
Thomas R. Fitzgerald
Director, Strategy & Research