Weekly Economic & Financial Commentary: Will FOMC Really Cut Rates in Second Half of the Year?

Summary

United States: Inroads Slowly Being Made on the Inflation Fight

• Inflation remains uncomfortably high in the U.S. In April, the CPI rose 0.4% on both a headline and core basis, keeping the core running at a 5.1% three-month annualized rate. However, details pointed to price growth easing ahead, while the Producer Price Index and NFIB small business survey also suggested more meaningful disinflation is on its way. Consumers aren’t so sure.
• Next week: Retail Sales (Tue), Existing Home Sales (Tue), LEI (Thu)

International: Bank of England Hikes Rates, Mixed Q1 Growth Trends in the U.K.

• The Bank of England (BoE) raised its Bank Rate by 25 bps to 4.50%, signaling it will keep a close eye on inflation dynamics this year. In addition, GDP data revealed the U.K. economy expanded 0.1% quarter-over-quarter in Q1. Household consumption was notably flat over the quarter, investment was significantly stronger than expected and the services sector faced mixed performance.
• Next week: China Activity (Tue), Japan GDP & CPI (Wed/Fri), Bank of Mexico Rate Decision (Thu)

Interest Rate Watch: Will the FOMC Really Cut Rates in the Second Half of the Year?

• The bond market is currently priced for 75 bps of Fed easing by the end of the year. One interpretation of that pricing is a 25% probability of 300 bps worth of easing coupled with a 75% probability of no easing. The FOMC could conceivably cut by 300 bps if something “bad” happens.

Credit Market Insights: Running a Tight Ship

• The Fed’s latest Senior Loan Officer Opinion Survey showed a broad-based tightening in lending standards over Q1. Expectations for worsening credit quality were joined by a reduced risk tolerance and concerns about banks’ funding costs and liquidity positions as reasons for tightening.

Topic of the Week: Year-Ahead Expectations Sour for Older Consumers

The results of the New York Fed’s Survey of Consumer Expectations were a mixed bag, with consumers reporting declining short-term inflation expectations but rising longer-term expectations. The recent declines in one-year ahead rates seem to be partially offset by the trend increase in the short-term inflation expectations of consumers over the age of 60.

Full report here.