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Powell Finds Balance, New Econ Data Mixed

Mark Vickery
Keeping a "patient" tone, while also keeping the possibility of a rate cut within view, Powell appears to have struck the right balance.

Thursday, June 20, 2019

Fed Chair Jerome Powell yesterday announced no interest rate cut would be forthcoming this month, disappointing some traders but granting much relief to the majority of the market. Keeping a “patient” tone, while also keeping the possibility of a rate cut within view, Powell appears to have struck the right balance. Pre-market futures are up big once again this morning.

“Risks… have clearly risen, but it’s important… not (to) overreact,” Powell said Wednesday. Indeed, while we’ve seen some weakness in select economic data over the past handful of weeks, ultimately we still see growth. Unless or until the data points in the other direction, expect this measured approach from the Fed to continue.

That said, if the Fed DOES NOT cut at the end of its next meeting late July, markets may be expected to react negatively. Currently, a quarter-point cut next month is already baked into estimates, which is one reason the S&P 500 is eyeballing new all-time highs this morning, with the round number 3000 in sight.

However, it’s important to keep in mind that Powell has insisted on the Fed being “data dependent” before shifting interest rate policy. For sure, a second-straight monthly disappointment in non-farm payrolls, along with a cooled-down Q2 GDP headline (expected just days before the next Fed meeting) — and with a plethora of other economic growth data heading downward — should ensure a rate cut. But what if strength persists?

This is the reason for Powell’s measured approach. After all, while low interest rates create a “cheap money” environment, they also prompt more borrowing and accrued debt. These are always double-edged swords, because excess borrowing becomes harder to pay off down the road.

Initial Jobless Claims remained in robust territory for the U.S. labor market, falling by 6000 claims week over week to 216K, and remaining within the historically strong 200-225K range. We’re still talking extremely strong employment numbers here, suggesting May’s low total on the non-farm survey was a bit of an anomaly.

Continuing Claims were revised upward the previous week to 1.7 million, but have come down again to 1.66 million. This is roughly in-line with the half-century lows we’ve seen in long-term claims, which also point to continued virility in the jobs market.

The Philly Fed survey for June posted a disappointing +0.3 headline this morning, well below the 8-10 expected and the 16.6 reported for May. Of course, this is a regional number, so it’s less damning for national production. Besides, these month-over-month figures very often demonstrate volatility. But following June’s paltry Empire State survey also coming in well low of expectations, numbers like these are worth paying attention, to going forward.

The Current Account Balance for Q1 is lower than expected — -$130.4 billion from the -$124.3 billion analysts were looking for — but better than the previous month’s originally reported -$134.4 billion. Again, see this as the other edge of the low interest “cheap money” sword.

Mark Vickery
Senior Editor

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