Fed rhetoric turns dovish

05 Jun 2019

US Fed Chair, Jerome Powell at a speaking engagement yesterday afternoon added weight to expectations that the Federal Reserve could react to the trade war escalation with interest rate cuts.  

 
Note though that Chair Powell did not mention any specific policy response or timing of any such adjustment, merely stating that we “are closely monitoring the implications of these developments for the U.S. economic outlook” and that “as always, we will act as appropriate to sustain the expansion”. Chair Powell’s comments were followed by words from Federal Reserve Board Vice-Chair Richard Clarida who added that “we will use appropriate policy if growth is slower than we expect or underlying inflation is lower”. Both comments followed words from the most dovish member of the FOMC on Monday, James Bullard of the St Louis Fed, who said a rate cut might be warranted soon.
 
Note that interest rate markets were effectively unmoved by Chair Powell’s advice, with their view that rate cuts would be forthcoming already clearly priced into the (interest rate) market. But with no specifics and Chair Powell still closely monitoring trade developments, this was not taken as a steer for a further adjustment. Note though that out-of-step adjustments were seen in equity markets where we witnessed a clear rally. The three main US equity indices closed anywhere between 2.06% and 2.65% higher on the day.
 

Mexico hopeful

On the trade front yesterday, comments from President Trump in London indicated that he expected tariffs to go ahead on Mexican goods (levies initially set at 5% from 10 June) with talks set to continue amidst the potential for further tariff rises after this, in incremental steps. The Mexican authorities held out further optimism however that the tariff increases could be averted, with foreign minister Marcelo Ebrard saying he was preparing a new offer to present to the Trump administration, expected to be delivered today. It’s also worth noting that House majority leader, Mitch McConnell stated that President Trump hadn’t got “much support” from the Republican Party for the proposed tariffs on Mexico.
 

Euro area inflation

Inflation figures for May missed expectations to the downside, with headline HICP recorded at 1.2% (consensus 1.3%), whilst core inflation (ex food, energy, alcohol & tobacco) eased back to 0.8% (consensus 0.9%) from April’s reading of 1.3%.  Some softening in inflation was expected in May following April’s Easter distorted rise. Nonetheless the continued subdued nature of inflation, where the core has remained in a 0.7%-1.3% range since 2016 is likely to raise some further questions about the inflation outlook ahead of this Thursday’s ECB meeting. Note that labour market data released at the same time saw the unemployment rate fall to 7.6% (consensus 7.7%) from 7.7%, continuing its downward trend, despite the current economic soft patch.
 

Economic Releases

09.00 EZ Markit Composite PMI
09.00 EZ Services PMI
10.00 EZ Retail Sales
13.15 US ADP Nonfarm Employment Change
14.45 US FOMC member Clarida Speaks
14.45 US Markit Composite PMI
14.45 US Services PMI