26 Jun HAS MONETARY POLICY EXPECTATIONS UNDEGONE A REALITY CHECK?
As noted many times the markets are suggesting the overnight rate will be lowered 0.75% by year end, a very aggressive 33% reduction. Some were expecting a 0.50% drop at the July meeting only to have their hopes dashed yesterday when one of the most dovish voting Fed members—James Bullard—commented any July rate cut should be limited to a quarter-point.
Equities quickly reversed course slipping moderately into the red. I rhetorically ask what happens if rates are not lowered? Comments yesterday from FRB Chair Powell stopped short of signaling a cut was imminent, reiterating remarks resembling those made at the conclusion June’s FOMC meeting.
The selloff accelerated, especially in the tech heavy NASDAQ 100 after a senior administration official said the US won’t accept further conditions on tariffs as part of reopening negotiations and no detailed trade deal is expected from the summit.
A pivotal question at hand is how much is the economy slowing? May’s new home sales fell short of expectations but this was from the lack of inventories. Sentiment levels were also lower than expected but in the pivotal category of “jobs easy to get” levels exceeded forecasts.
Typically home sales and jobs are primary determinates of the health of Main Street America…the populists or those who generally adopt historical cultural norms. I will continue to believe the economy will exceed expectations until home sales decline for reasons other than the lack of inventory and until job availability declines.
What will happen today?
Last night the foreign markets were mixed. London was up 0.04%, Paris up 0.09% and Frankfurt up 0.38%. China was down 0.19%, Japan down 0.51% and Hang Sang up 0.13%.
The Dow should open considerably higher on Treasury Secretary Mnuchin stated that a trade deal is 90% complete. Oil is up about 2% on a drop in inventories and trade/economic optimism. The 10-year is off 10/32 to yield 2.02%.