Financial markets continue to react to yesterday’s FOMC meeting, with Treasury yields grinding lower and global equity markets are higher (S&P 500 futures +1% currently). This week’s headlines have been positive for risk markets. It began on Tuesday with Mario Draghi’s dovish speech, opening the door for more accommodation from the ECB, and later that morning President Trump tweeted that he had a “very good” phone call with President Xi of China and that the two would have an “extended meeting” next week at the G-20 summit. The Fed capped things off yesterday with a more dovish tone from the official statement and updated Summary of Economic Projections (SEP).
The fed funds target range was left unchanged, but the word “patient” was removed from the official statement with regards to future interest-rate policy. The statement also added that “uncertainties about this outlook have increased.” In the SEP, the median FOMC participant forecast for the fed funds rate was unchanged from current levels for 2019, but the 2020 forecast was lowered 50 bps to 2.1% (now forecasting a 25 bps cut versus a 25 bps hike previously). Additionally, the long-run forecast (neutral or terminal funds rate) was lowered 25 bps to 2.5%. However, when you look at the individual forecasts, there is a clear divide. There are now seven FOMC participants (out of 17) projecting 50 bps of rate cuts by the end of 2019.
The projections for the GDP and unemployment were little changed, which is likely the Fed’s way of saying the underlying data trend is still solid, but there is now greater uncertainty surrounding the outlook for inflation and trade implications. If the former is the greater concern and there are now a large number of Committee members calling for cuts, some are naturally questioning the Fed’s reasoning for waiting to act.
As for Fed Chair Powell’s press conference, he continues to voice a non-reactionary tone from a policy perspective. “Seven weeks ago, we had a great jobs report and came out of the FOMC meeting feeling like our policy was in a good place, so we want to see and we want to react to developments and trends are sustained, that are genuine, and not react to just two data points or just to changes in sentiment, which can be volatile,” said Powell. In other words, the Fed is buying more time to see what evolves on the trade and data front before the July meeting and trying to not be pushed into a corner by the markets (or the White House). Easier said than done. Fed funds futures were already pricing in two rate cuts before year end and has now jumped to nearly 3 cuts post-FOMC.
Managing Director, Investment Management Group
|6/20/2019||Current Account Balance||-$124.3b||-$130.4b||-$134.4b||-$143.9b|
|6/20/2019||Initial Jobless Claims||220k||216k||222k||—|
|6/20/2019||Philadelphia Fed Business Outlook||10.4||0.3||16.6||—|
|6/20/2019||Bloomberg Consumer Comfort||—||61.8||61.6||—|
|6/20/2019||Bloomberg Economic Expectations||—||50.5||52.5||—|
|6/21/2019||Markit US Manufacturing PMI||50.5||—||50.5||—|
|6/21/2019||Markit US Services PMI||51||—||50.9||—|
|6/21/2019||Markit US Composite PMI||—||—||50.9||—|
|6/21/2019||Existing Home Sales||5.27m||—||5.19m||—|
|6/21/2019||Existing Home Sales MoM||1.50%||—||-0.40%||—|
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