“Futures markets are pricing in about 3bps of cuts at the 31 July FOMC meeting. We think this is too low. In fact, a July cut is our baseline,” Steve Englander Head, Global G10 FX Research and North America Macro Strategy said in a recent note.
About 14% of traders expect the Fed to cut rates in July, according to Investing.com’s Fed Rate Monitor Tool, but Englander points to recent slowing in the economy and inflation data that suggest the disinflation trend is alive.
The latest core PCE data, released Friday, showing inflation slowed more than expected in April from the prior month, and was in-line with estimates on an annualized basis, kept the “disinflation thesis alive,” Englander said, expecting more of the same in the coming months.
“There are two more PCE releases before the July meeting, so there is considerable room for core PCE to slow,” he added.
The strength in the labor market seen in Q1, however, has often been flagged as a catalyst for consumer spending and a threat to inflation , but Englander believes that a large chunk, or about 46% of the 269,000 average nonfarm payroll gain in Q1 was due to “undocumented immigrants getting employment authorisation.”
On the demand front, meanwhile, data on Friday showing consumer spending weakened in April, added some credence to Englander’s outlook.
Consumer spending, which makes for more than two-thirds of U.S. economic growth, increased by 0.2% in April, lower than expectations of 0.3%.
Still, the slew of Fed speak over the past weeks suggest that FOMC members are leaning into the central bank’s higher rates for longer stance.
“I’m keeping my eyes on the short-run trajectory, and if we can continue to see that trajectory move forward, I think we will be in a good place. I don’t think that’s going to be in July,” Atlanta Federal Reserve President Raphael Bostic said Thursday.
Source: Economy - investing.com
