US President Donald Trump has repeated his call for the Federal Reserve to cut interest rates, saying the central bank had been "very disruptive" and undermined the US position in talks with China.
Recent economic data has also provided some reason for the Fed to consider easing policy. Most notably, US employment creation slowed in May to just a net 75,000, versus expectations of 185,000. Average hourly earnings growth also moderated, to 3.1% year on year in May, the slowest pace in over half a year.
But despite this backdrop, we think the US president is unlikely to get his way anytime soon. Market expectations for 100 basis points of rate cuts by 2020 look exaggerated, in our view.
- The employment market data has been mixed rather than weak. After a near decade-long run of strong jobs growth, a slowing of it can either reflect weak demand for workers or a limited supply. With unemployment at a multi-decade low of 3.6%, we think that limited supply is a more likely explanation for May's weaker reading.
- That view is backed up by the fall in the U6 measure of underemployment, the share of people working part time because full-time work is not available. It declined to 7.1% – a post-2000 low. In addition, job opening data remained near a record 7.45 million for April, also pointing to robust demand for workers. Total vacancies exceeded the number of Americans without a job by 1.63 million, a high since 2000. Finally, the quit rate of 2.3% matched the peak since the economic expansion began. A full 3.5 million U.S. workers left their jobs – a sign that they feel confident.
- Consumer confidence is also riding high, with the Conference Board Measure at 134, close to its recent peak and around its apex this millennium.So, while the Fed may eventually be forced to support growth, especially if the ongoing trade dispute with China inflicts lasting damage on capital spending and employment, we don't expect a rate cut soon. The market overreaction to recent Fed rhetoric has pushed the 2-year US Treasury down by around 35 basis points over the past three weeks. We believe this creates an opportunity for investors and are underweight the 2-year Treasury versus cash.
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