FOMC discourages hawks with post-meeting language tweak
U.S. unemployment claims expected to remain favorable ahead of Friday’s unemployment report
U.S. ISM non-manufacturing index expected to show its third consecutive monthly decline
U.S. trade deficit expected to narrow to 5-month low
FOMC discourages hawks with post-meeting language tweak — The FOMC yesterday released a post-meeting statement with a tweak that seemed to be designed to prevent any market panic about the possibly of faster Fed rate hikes now that the PCE deflator has hit the Fed’s 2.0% inflation target. The headline April PCE deflator, released this past Monday, rose to +2.0% y/y and the core PCE deflator rose to +1.9% y/y.
The FOMC in yesterday’s post-meeting statement added the descriptor that its 2.0% inflation target is “symmetric.” The markets already basically knew that, but the FOMC apparently wanted to head off any concern that the Fed might consider 2.0% to be an inflation “ceiling,” which would imply that the Fed would need to speed up its rate-hike regime to prevent inflation from going above 2.0%. Instead, the FOMC was making it clear that it would allow inflation to move somewhat above 2.0% for some period of time since inflation has been below 2.0% for a number of years.
Specifically, the post-meeting statement said, “Inflation on a 12-month basis is expected to run near the Committee’s symmetric 2 percent objective over the medium term.” The FOMC’s comparable statement in its previous post-meeting statement was, “Inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Committee’s 2 percent objective over the medium term.”
The reaction of the federal funds futures curve to yesterday’s post-meeting statement was no change for the 2018 contracts and a small 1-2 bp dovish shift for the 2019-2020 contracts. The market is still discounting the odds at 100% for a rate hike at the next FOMC meeting on June 12, a 100% chance for another rate hike by the Sep 25-26 meeting, and a 50% chance for another rate hike at the Dec 18-19 meeting (i.e., the fourth rate hike of the year).
We suspect that the Fed will keep going with its pattern of a rate hike every other FOMC meeting (when there is a press conference) through year-end, meaning June 12/13, Sep 25/26 and Dec 18/19. The funds rate by year-end would then be at 1.25%/1.50%, i.e., solidly into real positive territory versus the 2.0% inflation target. The FOMC could then pause in early 2019 if the U.S. economy is flagging once the tax-cut fiscal stimulus starts to wear off. By contrast, the FOMC may need to put its rate-hike regime in a softer mode before the end of this year if the U.S. gets into an all-out trade war with China and U.S. economic growth starts to suffer.
U.S. unemployment claims expected to remain favorable ahead of Friday’s unemployment report — Today’s unemployment claims report is expected to show continued strength in the U.S. labor market ahead of Friday’s April unemployment report. The initial claims series last week fell to a new 48-year low of 209,000, which was the lowest level since 1969. Meanwhile, the continuing claims series last week was only +19,000 above March’s 44-1/2 year low of 1.818 million. The consensus is for today’s report to show a +16,000 rise to 225,000 in initial claims (reversing part of last week’s -24,000 decline) and a -2,000 decline in continuing claims to 1.835 million (adding to last week’s -29,000 decline).
On the labor front, the market is mainly looking ahead to Friday’s April unemployment report. April payrolls are expected to show a solid increase of +191,000, rebounding higher from March’s weak report of +103,000. March’s report was weak due to temporary factors such as weather and payback from Feb’s strong report of +326,000. Wednesday’s April ADP report of +204,000 was slightly above the consensus of +198,000 and supported expectations for a solid payroll report on Friday.
Meanwhile, the consensus is for Friday’s April unemployment rate to fall by -0.1 point to a new 17-year low of 4.0% from the 6-month streak of 4.1%. Friday’s expected unemployment rate of 4.0% would be just above the Fed’s forecast of 3.8% by year-end and 3.6% during 2019-2020. In any case, the expected unemployment rate of 4.0% would be below the Fed’s estimate of a long-term natural unemployment rate of 4.5%, indicating that the FOMC currently views the U.S. labor market as being tight.
U.S. ISM non-manufacturing index expected to show its third consecutive monthly decline — The market consensus is for today’s Apr ISM non-manufacturing index to show a -0.8 point decline to 58.0, adding to March’s -0.7 point decline to 58.8. Today’s report is expected to show the third consecutive monthly decline, although the index would still be left at the relatively strong level of 58.0.
The markets will watch to see if there is a drop in today’s non-manufacturing sentiment similar to Monday’s report that the April ISM manufacturing index fell by a hefty -2.0 points to 57.3 (and by an overall -3.5 points during March/April). The trade tensions that helped cause the -2.0 point drop in the April manufacturing ISM should in theory have less impact on the non-manufacturing sectors of the U.S. economy, which are less exposed to trade.
U.S. trade deficit expected to narrow to 5-month low — The market consensus is that today’s Mar U.S. trade deficit will narrow to what would be a 5-month low of -$50.0 billion from Feb’s 9-1/4 year high of -$57.6 billion. Today’s expected narrowing of the U.S. trade deficit would be welcome news given that President Trump’s entire economic and trade team is currently in China trying to wring trade concessions out of China. In a positive development, U.S. exports in February reached a new record high of $204.4 billion (+6.6% y/y). However, the bad news was that imports also reached a record high of $262.0 billion and showed larger growth of +10.9% y/y, leading to the higher trade deficit.