First Rate Cut in Ten Years on Tap This Week

Jul 29, 2019
Federal Reserve Building

Fed Rate Decision and July Jobs Report Highlight Busy Week

This week will be highlighted by the expected Fed rate cut on Wednesday but there are plenty of other headline events that will keep investors busy. While a 25bps rate cut is just about a foregone conclusion, the parlor room scuttlebutt centers on how Powell and Co. will deliver yet another more-dovish-than-expected meeting. The betting here is that in addition to the rate cut Powell will make clear that additional easing measures will be forthcoming as long as global economic cross-currents remain in place. With more and more central banks joining the rate-cutting path the Fed will have a hard time being one-and-done given the impact that would have on the dollar and the resultant import price deflation that comes from dollar strength. Apart from the Fed, the July jobs report is expected to be a solid read on the labor market but off the outsized strength exhibited in June. 


Treasuries
Treasury Curve Today Week Change
3 Month 2.12% -0.09%
6 Month 2.09% -0.03%
1 Year 1.97% UNCH
2 Year 1.84% -0.02%
3 Year 1.81% UNCH
5 Year 1.84% +0.02%
10 Year 2.06% +0.04%
30 Year 2.58% +0.06%
Short-Term Rates
Fed Funds 2.50%
Prime Rate 5.50%
3 Mo LIBOR 2.27%
6 Mo LIBOR 2.20%
12 Mo LIBOR 2.20%
Swap Rates
3 Year 1.816%
5 Year 1.814%
10 Year 1.983%
Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
July 30 Personal Income June 0.4% 0.4% 0.5%
July 30 Personal Spending June 0.3% 0.3% 0.4%
July 30 S&P CoreLogic CS 20-City HPA May 2.54% 2.40% 2.54%
July 30 Conf. Board Consumer Confidence July 125.0 125.0 121.5
July 31 FOMC Rate Decision Jul 31 2.00%-2.25% 2.00%-2.25% 2.25%-2.50%
Aug 1 ISM Manufacturing July 52.0 52.0 51.7
Aug 2 Change in Nonfarm Payrolls July 160k 166k 224k
Aug 2 Unemployment Rate July 3.7% 3.7% 3.7%
Aug 2 Univ. of Michigan Consumer Sent. July 98.5 98.5 98.4

calendar icon Top 5 Events for the Week

July 29 - Aug 2, 2019

1. Fed Rate Decision – Wednesday
2. July Employment Report – Friday   
3. July Consumer Confidence Readings – Tues./Fri.        
4. July ISM Manufacturing – Thursday 
5. June Personal Income & Spending – Tuesday

 

1.  Fed Rate Decision —Wednesday

While the Fed is expected to deliver a 25bps rate cut, the parlor room scuttlebutt centers on how Powell and Co. will deliver yet another more-dovish-than-expected policy statement that has been their stock-in-trade this year. The betting here is that in addition to the rate cut Powell will make clear that additional easing measures will be forthcoming as long as global economic cross-currents remain in place. With more and more central banks joining the rate-cutting path the Fed will have a hard time being one-and-done given the impact that would have on dollar strength and the resultant impact of import price deflation that comes from that strength. Another item they may deliver is an early end to portfolio run-off that was expected to continue through September. Some discussion of a term repurchase program may happen as it’s expected a program needs to be in place before year-end in order to ease liquidity volatility as the calendar turns. 

 

2.  July Employment Report-Friday

While the expected rate cut on Wednesday will be the highlight of the week, the July jobs report on Friday will garner plenty of attention before the weekend as investors weigh the state of the economy and the likelihood of additional rate cuts in the fall. The headline number is expected to print a 166k gain versus the surprising 224k the prior month.  The unemployment rate is expected to stay at 3.7% for a second straight month while wage gains are expected to remain at 0.2% for the month matching the June result. YoY wage gains are expected to tick higher to 3.2% after two months at 3.1%.   In summary, if the report comes as expected it will show a labor market that moderated in July off surprisingly strong June results but not enough to stoke any near-term slowing concerns.

 

3.  July Consumer Confidence Readings—Tuesday/Friday

If the second quarter GDP taught us anything it’s that the consumer is the one running the show right now. Given the outsized increase in consumer consumption during the quarter measuring the confidence of the consumer is critical to gauging their predilection to continue spending. While the jobs report is expected to post a solid read on hiring and wages, confidence is the other piece of the consumer spending puzzle. In that regard both confidence reports this week are expected to post nice bumps versus prior month readings. The Conference Board’s Consumer Confidence report for June is due tomorrow and is expected to post a 125.0 result versus 121.0. The index posted a high of 137.9 last October but the expected sequential gain points to continued healthy spending by the consumer. On Friday, the final July reading of the U.  of Michigan sentiment series is expected to be 98.5 versus 98.4. That series peaked at 101.4 in March of 2018.

 

Conf. Board Consumer Confidence

 

4.  July ISM Manufacturing–Thursday

Along with this week’s jobs report the ISM Manufacturing Survey will give us another early tell on July activity with the report due on Thursday.  The forecast is for a meager bounce to 52.0 versus 51.7 in June and well below the 12-month average of 56.0.  The 50-level represents the dividing line between an expanding and contracting sector. The slowing in manufacturing is attributable to inventory overbuild that was noted in recent GDP reports and to slowing global growth prospects.  In summary, the ISM’s weakening trend is expected to level off in July with results hanging precariously close to contraction territory. The Fed will no doubt be watching. 

 

5. June Personal Income and Spending —Tuesday

Personal income and spending numbers are usually first-tier releases but with the June numbers coming on the heels of the second quarter GDP some of the surprise has been stolen. Given the strength in consumer consumption noted in the GDP release it’s no surprise the June income and spending numbers are expected to be solid. For the month, income is expected to have increased 0.4% versus 0.5% in May. Meanwhile, spending is expected to have increased 0.3% versus 0.4% in May. The Fed’s preferred inflation measure, core PCE, is expected to have increased 0.2% for the month and 1.7% year-over-year, indicating inflation will remain firmly below the 2% target. 

 

 


bar graph icon  Investment Yield Ranges Over Last Year

 

US TreasuriesFHLB Agency BulletsMortgage Backed SecuritiesMunicipalsUS Corporate - FinancialsUS Agency Swap Rates 

Source: Bloomberg

 


 

Tom Fitzgerald Signature 

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

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