SMM News: the recent release of key indicators in the United States did not meet expectations, coupled with the Fed officials to adjust the attitude of monetary policy has eased, the outside world to the Federal Reserve interest rate cut expectations are heating up. The latest forecasts show that the Fed has an 80% chance of cutting interest rates at least once by July, suggesting that expectations for a rate cut are already strong.
Economic data "overcast"
Figures released by the US Labor Department on the 12th showed that due to the decline in energy prices, the US consumer price index (CPI) rose 0.1 per cent in May from a month earlier, down from 0.3 per cent in April and below market expectations. The figures also showed that CPI in the US rose 1.8 per cent in May from a year earlier, down from 1.9 per cent in April and below market expectations. Excluding volatile food and energy prices, core CPI rose 0.1 per cent in May from a month earlier. Core CPI rose 2 per cent from a year earlier, down 0.1 percentage points from April.
Economists surveyed by Bloomberg had forecast that overall US CPI rose 0.1 per cent in May from a month earlier, up 1.9 per cent from a year earlier, and core CPI rose 0.2 per cent from a month earlier and 2.1 per cent from a year earlier. Dow Securities analysts believe that the decline in CPI data is mainly due to the results of the normalization of energy prices, which has been one of the important drivers of CPI data in recent months, and has partly had a negative impact on inflation in the United States as oil prices have continued to fall recently.
Employment and inflation are two economic indicators that the Fed focuses on when it sets monetary policy. The unemployment rate remained flat at a nearly 50-year low of 3.6 per cent in May, but only 75000 jobs were created in the non-agricultural sector, far below market expectations, according to figures released by the Labor Department on June 7. it is also a far cry from the revised April figure. The average hourly wage rose 0.2% month-on-month and 3.1% year-on-year, both of which fell short of expectations. In the US, (ADP) employment rose by just 27000 in May, the lowest since March 2010 and well below expectations of 185000. So far this year, the US non-agricultural sector has created an average of 164000 jobs a month, down from 223000 in 2018. According to the analysis, these all highlight the signs that the US job market may be slowing down.
Not only that, data released on June 3 by the Institute for supply Management, an authoritative US industry research institute, showed that the US manufacturing purchasing managers' index (PMI) fell 0.7 to 52.1 in May from a month earlier, the lowest level since October 2016, due to global trade tensions. At the same time, data released by IHS Markett on the same day also showed that the US manufacturing PMI fell to 50.5 in May from a month earlier, the lowest level since August 2009, and was on the verge of 50 prosperity and decline.
Lu Ke Tilly, chief economist at Wilmington Trust, said that while monthly data fluctuations sometimes did not mean anything, there were enough signs that the US job market was indeed slowing. At the same time, the slowdown in employment is in line with lower trends in the ISM manufacturing purchasing managers' index (PMI) and other data, "which appears to be the result of uncertainty over trade tariffs and trade frictions".
The US retail sales data, which will be released on the 14th local time, have also attracted much attention from the market. As car consumption accounts for an important proportion of the US economy, insufficient car consumption will lead to a sharp weakness. If the data on the 14th is not good, it may further strengthen the market's expectations of weak inflation.
As US CPI data fell below expectations, expectations of the Fed cutting interest rates rose, and the dollar's decline intensified, hitting a daily low of 96.58. Euros against the dollar, sterling against the dollar continued to rebound: the euro against the dollar close to the previous high of 1.1348; sterling against the dollar as high as 1.2758. At the same time, CPI data increased the market's risk aversion preference, U. S. bonds are sought after, yields fell. On the 12th, the yield on the 10-year Treasury note fell 2.3 basis points to 2.112%. The yield on the 2-year note tumbled 5.7 basis points to 1.869 per cent. The yield on the 30-year note fell 1.9 basis points to 2.595 per cent.
The Fed is on the cusp of cutting interest rates
The Fed will hold a regular meeting on monetary policy from June 18 to 19. Analysts now expect the Fed to cut interest rates twice in July and September and send signals after its June meeting. Powell, chairman of the Federal Reserve, said a few days ago that the Federal Reserve is paying close attention to the impact of trade frictions on the US economy and will take appropriate action to maintain the expansion of the US economy. This statement was interpreted by the market as an open attitude of the Federal Reserve to cut interest rates.
Earlier this month, James Brad, president of the Federal Reserve Bank of St. Louis, said inflation below target and low unemployment were reasons why the Fed should cut interest rates. Charles Evans, president of the Federal Reserve Bank of Chicago, also said that if US economic growth is weaker than expected or inflation remains too low, it will give the Fed room to cut interest rates. At the same time, Powell also said that he would be open to cutting interest rates. As a result, expectations of the Fed's rate cut are rising further as recent poor US economic data add to weak inflation.
"the backdrop of weak inflation reinforces our forecast for two interest rate cuts later this year," said Michael Ferrari, an analyst at JPMorgan Chase in New York. Given that the economy is still growing and trade-related risks are still twofold, it may be too early to expect action next week.
The latest forecast by the Chicago Mercantile Exchange, based on data from the federal funds futures market, shows that the market believes the Fed is less than 20 per cent likely to relax policy next week, but the probability of the Fed cutting interest rates at least once by July is about 80 per cent. The probability of at least one rate cut in September is more than 90 per cent. Shinichiro Kadota, senior strategist at Barclays in Tokyo, said: "the market has largely digested expectations that the Fed will cut interest rates, so the market sees next week's Fed meeting as an opportunity to understand the extent and duration of the Fed's policy easing."
But some analysts disagree. Yang Hachus, chief economist at Goldman Sachs (191.45,1.230.65%), pointed out in a study that the Fed will keep interest rates unchanged for the rest of the year. He believes that at a time when concerns about trade policy have intensified sharply, Fed Chairman Powell's speech has only focused on longer-term issues, not in a strong indication that interest rates are about to be cut. It is to reassure people that the Fed is aware of the risks of trade frictions.
"interest rate cut tide" or start for this
Recently, central banks in some major economies have cut interest rates or sent signals of easing. On June 6, the Reserve Bank of India cut interest rates by 25 basis points, the third rate cut this year, and on June 4, the Reserve Bank of Australia cut interest rates by 25 basis points, the first rate cut in nearly three years. In addition, the Central Bank of New Zealand and the Central Bank of the Philippines also announced interest rate cuts in May.
At its June monetary policy meeting, which ended on the 6th of this month, the ECB adjusted its forward-looking guidance on interest rates, announcing that current interest rates would remain unchanged until at least the first half of 2020. The ECB had previously described this point in time as "the end of 2019". Analysts pointed out that as the current momentum of global economic growth has significantly weakened, some major central banks have begun to relax monetary policy, the latest decision of the European Central Bank means that there may be no possibility of raising interest rates in the euro zone in the short term. Economists believe that with the slowdown in world economic growth, it is no longer possible for the euro zone to raise interest rates in the short term, and judging from the recent trading of relevant interest rate products, investors even expect the European Central Bank to cut interest rates in the second half of 2020.
According to a recent survey of analysts, analysts generally believe that the policy tightening cycle of major central banks is over, given the bleak outlook for global growth and weak inflation. According to the analysis, the uncertainty caused by trade tensions and Britain's "Brexit" has led to a weakening of the momentum of global economic growth, which is the main reason why the monetary policy of major central banks has turned to easing, and the global "interest rate cut tide" may have begun.
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