In case we needed another reminder .... "normal" rules do not necessarily apply
ref :- " Poor inflation data cloud Fed's next rates move " , The Financial Times , and "Bond Traders Betting on a Fed Rate Cut Won't Be Easily Dissuaded", Bloomberg Markets
It's a busy week in store .... loads of important data and the Fed's two-day monetary policy meeting on Tuesday and Wednesday. Once again, there's no chance of any change in rates but it's what we might learn about the Fed's current thinking on monetary policy that will be key.
Talking of data, Friday saw the release of the US 1st quarter GDP number .... which posted much higher-than-expected annualised growth of 3.2% (expected to show 2.3%). Now in the old days, that kind of upside surprise could have been expected to provoke two particular responses. First, party time for stock markets .... and indeed new record highs were posted across the range of US stock indices. The second reaction one might have anticipated would have been selling of interest rate markets, as traders assumed that such a strong growth figure, and the upward inflationary implications that one would normally have associated with it, would, in turn, imply upward pressure on monetary policy.
As we've often discussed and most recently on Thursday, things ..... and most particularly things to do with inflation ..... are just not working that way these days. Bond prices actually closed higher (that means bond yields were lower, of course) as traders looked behind the headline numbers. The personal consumption element of the data was weaker than expected, suggesting that it might be difficult to maintain such a growth rate as the year progresses. But more to the point, the inflation measures were also weaker than expected, despite continued strong growth in both jobs and wages.
For bond markets to post gains after a strong GDP number may be little counter-intuitive, but it's no surprise that for Wall St. the combination of good growth and a benign outlook for interest rate policy paints something of a golden picture.
Later today we see the release of the Fed's preferred measure of inflation for March, the Core (ex-food and energy) Personal Consumption Expenditure (PCE) Price Index. Depending on who you listen to, expectations are for a rise of 1.6% or 1.7% .... both of which are well shy of the Fed's inflation target of 2.0%. Anything weaker than that will only increase the conviction amongst futures traders that a 25bp CUT in rates by the end of 2019 is the most likely scenario.
So if you're only able to keep half an eye on things this week, we suggest that you concentrate on just three things :
Today's Core PCE number
Wednesday's Fed statement
Friday's employment data
These are important events for investors and traders, and no doubt if there any surprises to the downside those voices calling for easier monetary policy will grow louder. The loudest of those voices might just be President Trump's .... though the irony about that, of course, is that the Fed will be loathe doing anything that looks like they are kowtowing to the President's wishes and thereby undermine their own status as a central bank independent of pesky politicos.
We're not at all convinced that the President is much of a one for the irony, however, and such is his conviction that the success of his presidency should be measured by the level of the stock market that we fully expect him to continue to call for asset-inflating rate cuts whether they're appropriate or not.