May 2024

The May employment report, released earlier this month, fully took the air out of the notion that the Fed would cut interest rates in the near term.  After April’s report came in below expectation, economists were expecting the number of new jobs created for the month would total 180,000, with the low estimate at 120,000 and the high at 259,000.  The actual number blew past those forecasts with 272,000 new jobs created in the month.  The report was a little messy in that the household report showed a contraction of 408,000 jobs and the labor force shrunk by 250,000 workers causing the unemployment rate to tick up to 4.0%.  We advise to look past that uptick due to a few nuances between the household and the establishment survey.  From our view, the bottom line is the June jobs report changes the soft-landing narrative and further postpones the likelihood of a rate cut anytime soon.

The consumer price index (CPI) for May was released on the morning of the conclusion of the 2-day FOMC meeting, and mostly offset the rise in interest rates that occurred after the better-than-expected employment report.  The one-month change to the index was 0.0% and the headline year-over-year index rose 3.3%, a 0.1% improvement over the reading last month.  That was enough to rally the capital markets, pushing the yield curve down to recent lows and the S&P 500 to a fresh all-time high.

The FOMC meeting was widely expected to be inconsequential, with no expectation that the committee would lower the overnight rate.  That expectation was dashed as the committee adjusted the “dot-plot,” their expected path of interest rates for the near future, to reflect only one rate cut this year, down from three earlier this year.  Looking to 2025, they now see 100 basis points of rate cuts versus the 75 they were previously forecasting.  Interestingly, the statement this meeting referred to the process in reducing inflation as “modest,” compared to last month, where they referred to it as a “lack of further progress.”  Also, the statement from the committee reiterated their intention to slow the pace of their monthly balance sheet roll off from $60 billion to $25 billion.

At the post-meeting press conference Chairman Powell struck a decidedly confident tone, noting the economic growth has eased from the robust pace experienced in 2023 to a more moderate, healthy pace currently.

While the market reaction was positive, the two-year note is still well above the 4.15% touched in January, more than 60 basis points higher, indicating that investors believed the Fed was on the verge of panic at that time, and now the committee is expected to be more patient in cutting rates.

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