by Hubert Marleau, Market Economist, Palos Management
June 13, 2024
This week's Non-Farm Payrolls report, along with a range of other employment metrics, showed noticeable signs of labour market deceleration. Meanwhile, the May CPI report showed that headline and core consumer prices had risen by their lowest level in 3 years, increasing 3.3% y/y and 3.4% respectively.
Armed with fresh data on employment and inflation, the Fed decided to hold the policy rate at 5.375%, believing that the composition and level of the misery index, which is the addition of inflation and the unemployment rate, was not in a good enough place to warrant lower interest rates. It currently stands at 7.2 - 3.3% for inflation and 3.9% for unemployment - with inflation accounting for 46% of the total. The perfect score that the Fed is seeking is 6.2 - 2.0% for inflation and 4.2% for unemployment - with inflation representing roughly 30% of the combination.
In this regard, the market’s fixation was on the interest rate projection that the monetary officials produce every quarter-end, seeking clues as to when the Fed easing cycle might officially begin. The whole concept can have a material effect on market perceptions. The economic projections of the Fed’s members and presidents suggested that the misery index will likely fall to 6.5 in 2025 and 6.2 in 2026, with an inflation content of 35% and 32% respectively.
Although the Fed rained on the traders’ parade, the sunny outlook for the misery index was just too good to ignore. Interest rate futures surged from 50% to 71% against odds of one rate cut by the end of September, and 52% to 69% of two rate cuts by the end of this year. The takeaway was bearish for the dollar, but bullish for stocks.
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