FOMC Rate Decision Today

• The Fed will render a rate decision at 2pm ET and the market odds of a hike sit at 36%. While that may seem low, it’s not low enough to remove all doubt. With a more vocal Fed of recent vintage, market expectations usually aligned by decision day with Fed action. New Fed Chair Warsh has taken a different tact in limiting public discussion of Fed thinking, (at least his thinking), to reduce the potential for confirmation bias seeping into the decision process. That, however, inevitably leads to more uncertainty which could lead to more market volatility. We discuss our thoughts on the meeting below but suffice it to say we remain in the hawkish hold camp.  Apart from the Fed, Iran fired missiles towards US troops in Jordan early Wednesday with all missiles reportedly destroyed before hitting their targets, and US and Saudi forces attacked Iran-backed militias in Iraq. Those overnight actions have dimmed hopes for peace negotiations and oil prices have rebounded as a consequence (WTI $82.90/bbl up $3.64).  Currently, the 10yr is yielding 4.68% up 3bp, while the 2yr is yielding 4.32%, up 5bp on the day.

 

• While a Fed rate hike today is not the consensus expectation, it’s not out of the question either. If the Fed hikes today, the market will quickly price another hike or two by year end, as a single hike wouldn’t impact prices to any material degree, but it would signal the easing phase is over.  That would mean higher short-term rates reflecting the shift in policy and perhaps a modest rally on longer-duration bonds as the Warsh Fed reinforces its inflation fighting credentials with this somewhat unexpected hike.

 

• With that said, we continue to think this will be a hawkish hold, with the Fed pausing but setting the stage for a possible hike in September when they have two more months of inflation reports, and of course, more time to ponder the latest developments in the Middle East. We’ll be back this afternoon with a recap of the rate decision.

 

• Away from Fed news, ADP published its weekly Pulse Report yesterday and found 15 thousand new private sector jobs for the week ending July 11. The report uses a four-week average and is the fifth straight week of declining job growth and ninth out of the last 10 (see graph below). Despite the decreasing weekly totals, with monthly growth in the 60 thousand range, and given the recent static nature of the labor force, it implies the labor market continues to operate near equilibrium. That means the unemployment rate is likely stable at 4.2%, despite the slowly declining job growth totals. On the other hand, if job growth were accelerating, on top of inflation remaining well above the 2% target, Warsh may have been able to wrangle a majority to hike at today’s meeting.

 

• Another report from yesterday was the Conference Board’s latest read on consumer confidence for July. Confidence declined slightly from June (90.8 vs. 92.2) and was shy of the 92.4 expectation. The Present Situation reading declined slightly (114.9 vs. 118.5) and is the lowest reading since February 2021. Meanwhile, the Expectations print was unchanged at 74.7, which is a 12-month high.

 

• In a modestly positive development, inflation expectations for the next year eased lower from 4.6% to 4.2%, while the five-year expectation of inflation was unchanged at 3.3%. In the comments section, affordability continues to be the main concern with food and grocery costs cited frequently. Mentions of the war, and oil/gas prices eased slightly but remained elevated.

 

• Finally, the Labor Differential (Jobs Plentiful – Jobs Hard to Get) decreased slightly from an upwardly revised June 3.1 vs. 3.8 (originally 2.4). Aside from the gyrations caused by Covid and the lockdowns the current reading is the lowest since 2017 (see graph below).  In the comments section there was a notable increase in job and unemployment concerns and that was picked up the Labor Differential reading slipping lower.

---

Odds for Hike today at 36% – Low but not out of the QuestionSource: CME Group

---

 Weekly ADP Private Sector Job Growth Continues to Trend LowerSource: ADP

---

Conference Board’s Confidence Reading for July Edges LowerSource: The Conference Board

---

Conference Board Inflation Expectations Slip Lower at 1yr and Unchanged at 5yr

Source: The Conference Board

---

Labor Differential Slips to a post-Covid Low on a Drop in Jobs Plentiful Reading

Source: The Conference Board