Fed Unlikely to Support 75bp in June

US

Key Points

• Fed likely to push back against 75bp hike in June, that currently puts the market prices at 50%.
• Scope for positive headline NFP surprise.

Fed

The Fed has already pre-announced QT and a 50bp hike.  The real uncertainty is whether Powell hints at a much higher terminal and neutral FFRs than in the March SEP.  In particular, markets are now pricing 50% chance of a 75bp hike in June and presser participants are bound to ask about it.  I don’t expect Powell to support 75bp so soon in the cycle largely because it would be an implicit admission of policy error.  Please see my FOMC preview.

Post meeting speakers this week include Bostic, Williams, Bullard, Waller and Daly.

Data

Last week’s data suggested continued strong inflation dynamics: wage growth was much higher than expected and while headline GDP growth was negative the details actually showed strong demand growth. Covid cases increased but hospitalizations did not.

This is a data rich week.  By order of importance, here are my expectations/comments:

1. NFP: the consensus expects a limited slowdown to 390k from 431k in March.  I see more of a scope for positive than negative surprises as recent data on credit and spending suggests the economy could be getting a second wind from household borrowings. Based on today’s ECI that suggests strong wage growth dynamics I see scope for an upside surprise to MoM wages, which the consensus sees as same as March. I agree with the consensus expectation of a 10 bp increase in participation: low-income households are going back to work to pay the bills. 
2. ISM PMIs: the consensus sees a small increase that would be consistent with an economic rebound.
3. Consumer credit: this is the Fed Board measure of consumer credit, i.e. excluding mortgages.  I will be looking for an increase. 
4. JOLTS are likely to show the same combination of historically high quit rates and historically low actual hires relative to vacancies.
5. Other key data includes construction spending, factory orders, trade balance, unemployment claims and real estate market data.

Events/Political Developments

The administration is considering cancelling about $10,000 in individual student debt. It has also requested from congress $33bn in additional funding for Ukraine.

Links to New York Fed POMOs/TOMOs:  Repos, Treasury, MBS, CMBS

Other G20 Countries

This week the RBA will hold its policy meeting and we expect a 15bp hike. The RBA will also publish its SOMP (Statement on Monetary Policy) and the BoJ will publish its minutes. The BoC’s Rogers and Schembri will be speaking.

Key data releases include PMIs in Japan, China, Canada and Australia. 

Links to BOJ Rinban , BOE OMO

COVID-19 Monitoring

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)