If Federal Reserve officials are thinking of dashing bond investors’ expectations for lower rates, they have have plenty of airtime in the days ahead to deliver that message.
Traders have already absorbed a significant blow to their rate-cut bets, after Friday’s payrolls report showed a steeper-than-expected rebound in hiring. Futures still indicate a quarter-point cut in July, although about 6 basis points more easing had been priced in before the jobs data, and it may not take much to shake traders’ conviction even further. The U.S. and China are still in talks to resolve their trade dispute, while America’s manufacturing and services industries continue to expand, even though the pace has slowed.
A Fed on hold past July could derail more than futures positions. The yield-curve flattening of the past two weeks could gain momentum, shaking off steepening bets that thrived last month as the Fed opened the door to a cut. Investors who have poured money into Treasury exchange-traded funds this year may also be blindsided. The jobs report catapulted the 10-year yield by 8 basis points from close to its lowest level since 2016, to 2.03%. It was the benchmark’s biggest jump since April, though thin turnover in a holiday-shortened week may have exaggerated the move.“No cut at all in July would likely require some talking down of market pricing by the Fed,” said Jonathan Cohn, head of rates strategy at Credit Suisse.
That’s not his base case, as he expects the Fed would be unwilling to risk undermining stocks. Economists at Goldman Sachs Group Inc. agree, putting the probability of a quarter-point drop this month at 60%, with a 15% chance of a larger move, according to a note published after Friday’s data.
But if policy makers are inclined to hold off, they’ll have ample opportunity to explain that. Most notably there’s Fed Chairman Jerome Powell’s semi-annual testimony to Congress on Wednesday and Thursday. The minutes of last month’s policy deliberations are set for release as a reminder that, even before these stronger employment data, a slim majority of officials wasn’t expecting to lower rates this year.
Jim Vogel at FTN Financial says positioning for Fed action beyond July is most at risk in the coming week. He says traders may have to rethink their conviction in interest rates falling at least a half-point this year from its current range of 2.25-2.5%.
“The question really moves beyond, ‘What about July?’ to, ‘Is there really a chance now of 2% by the end of the year?”’
He’s looking for guidance from the Fed this week rather than the data. In his view, the subdued trend in consumer prices — due Thursday — is unlikely to shift for now, and he hasn’t seen any alarm among Fed officials recently over the prevailing sub-2% readings.
What to Watch
- Bond traders will also be looking at a Bank of Canada decision July 10, with no change in rates expected. As for the U.S., here’s the economic calendar next week:
- July 8: Consumer credit
- July 9: NFIB small business optimism; JOLTS job openings
- July 10: MBA mortgage applications; wholesale trade sales and inventories
- July 11: Consumer price index; initial jobless claims; real average hourly and weekly earnings; Bloomberg consumer comfort survey; monthly budget statement
- July 12: Producer price index; Bloomberg July economic survey
- Fedspeak goes on a tear:
- July 9: St. Louis Fed’s James Bullard speaks locally; Atlanta Fed’s Raphael Bostic is also in St. Louis
- July 10: Powell testifies before House Financial Services Panel; Bullard speaks again in St. Louis; Fed releases minutes from June meeting
- July 11: Powell testifies before Senate Banking Committee; New York Fed’s John Williams speaks in Albany, New York; Bostic at Fiscal Conference; Richmond Fed’s Thomas Barkin at Rocky Mountain Economic Summit; Minneapolis Fed’s Neel Kashkari in South Dakota
- Chicago Fed’s Charles Evans in Chicago
- The auction calendar:
- July 8: $36 billion 3-month bills; $36 billion 6-month bills
- July 9: $38 billion 3-year notes
- July 10: $24 billion 10-year notes reopening
- July 11: 4-, 8-week bills; $16 billion 30-year bond reopening