7/26/24 – Soft data fuels further steepening of yield curve

The data this week was decidedly mixed – although the Bond market priced in further cuts.  The Philadelphia non-manufacturing index plunged to -19.1 from the 2.9 recorded last month.  Similarly, the Richmond Fed manufacturing index dropped to -17 from the -10 recorded last month.  As expected, there was no joy to be found in the housing sector as existing and new home sales were both down for the month.

Offsetting those dismal indicators this week was the release of advanced GDP calculation for Q2.  Economists were expecting that GDP would rise from the 1.4% growth in Q1 to 2.0% in Q2.  Instead, the economy expanded at double the rate of the first quarter, coming in at 2.8% annualized.  Digging through the details, the first pass looks even better; personal consumption grew at an annualized rate of 2.3% and net imports subtracted 0.93% from overall domestic growth.

The big news this week was Bill Dudley’s statement that the Fed should abandon the higher for longer policy and instead cut the overnight rate, possibly as soon as next week.  The former Goldman Sachs chief economist and former President of the Federal Reserve Bank of New York said “The facts have changed so I changed my mind.”  Given his credibility we wonder if his opinion could be enough to influence next week’s rate decision.  Probably not, but recent economic data indicates that growth has downshifted to the extent that a rate cut is justifiable.  What’s likely to hold the committee back from a July rate cut is they have consistently prioritized communication and to cut the rate without signaling first would be a reversal of that strategy.

Given the combination of the continued weak data and Fed whisperer Dudley, the bond yields fell for the week with the 2-year 13 basis points lower to 4.38% and the 30-year unchanged, taking the 2-year/30-year yield curve to a positive 7 basis points.  It had traded as high as 11 basis points earlier in the week.

The optimism for a near-term rate cut did little to offset the swoon in technology-related equities as investors question valuation metrics in the that sector.  The I-shares technology ETF (IGM) has fallen over 8% since touching an all-time high two weeks ago.  That ETF bounced a bit at week’s end as the broad market began to again anticipate an accommodative Fed.

Looking to next week, we’ll get the one-two punch of the FOMC meeting on Wednesday and the July employment report on Friday.  The consensus expectation is that the economy will add 185,000 new jobs in the month, and as we wrote earlier we don’t think the FOMC will lower the overnight rate at this meeting.