Powell Testimony, Fed Policy and Upcoming US Economic Data

The markets are not likely to be derailed by Fed Chair Powell's Semi-Annual Monetary Policy Report and testimony on Wednesday and Thursday.   While he should not tilt the odds regarding a July rate cut, he should keep the possibility open.  He should reiterate the main point of the June FOMC Statement -- the Fed "will act as appropriate to sustain the expansion."  He also could cite the lowered expectations of the funds rate embodied in the latest "dot" chart.  But, if he does, he will likely emphasize they are just best estimates and not a plan to be put necessarily into effect.

The large gain in June Payrolls may get passing mention, but Fed policy is not tied to any one economic report.  Moreover, there were elements in the Employment Report arguing in favor of a rate cut (see my prior blog).  Powell will probably highlight the increased uncertainties and downside risks in the outlook as well as "muted inflation pressures" that support the Fed's keeping its finger on the trigger.  But, he also could reiterate the Fed's view that "sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the the most likely outcomes." This optimistic outlook could be taken positively by the stock market.

Besides Powell's testimony, the markets also will pay attention to the June CPI (due Thursday).  Consensus looks for +0.1% m/m Total and +0.2% Core.  The y/y would rise to 1.8% from 1.5% for Total and be steady at 2.0% for Core.  So, consensus-prints would be consistent with the Fed's targets.  The risks are mixed.  The tariffs on Chinese imports imposed in early May could begin to show up.  But, owners' equivalent rent could slow, as did primary rent in May.  In any case, the Fed is not likely to be deterred from easing by one high Core CPI print, particularly since it would follow a low print in May.

Whether the Fed eases at the July 30-31 FOMC meeting may very well have more to do with how the markets perform.   If market yields remain low, the Fed will probably cut by 25 BPs.  But, its Statement could emphasize that further cuts will be dependent on "incoming information for the economic outlook."  This could be a disappointment for the markets, particularly if, as is likely, some key US economic data strengthen and further reduce the odds of more Fed easing.   In this regard, early evidence points to increases in June Retail Sales and Industrial Production.  Core Durable Goods Orders will be of particular interest, being a leading indicator of capital spending.  The job gains in capital goods industries in June suggest an upward surprise in Orders.