The likelihood of the Fed cutting rates by up to 75 basis points is likely an exaggeration

Outlook

This week we get a Treasury quarterly refunding auction schedule and the Fed rate decision on Wednesday, followed on Friday by the biggie, nonfarm payrolls. Before then, we get the JOLTS report tomorrow and the ADP private sector estimate on Wednesday.

The Bank of Japan is also on Wednesday and the Bank of England on Thursday.  The eurozone delivers flash CPI for July on Wednesday. Earlier that day, Australia reports retail sales and Q2 CPI. The Reserve Bank meets the following week (Aug 6) and widely expected to be on hold.

The forecast for nonfarm payrolls is not bright. Reuters has 185,000, the smallest jobs gain since April. Bloomberg has 190,000, not significantly below June at 206,000, although there will be hand-wringing. Equally important is the unemployment rate, probably the same 4.1%.

The core PCE data was not good.  But the market at large didn’t much care. A late Friday Bloomberg headline had “The Fed’s preferred inflation gauge cools, boosting rate-cut hopes.”

Well, no. A key takeaway is core services up 4.3% from 3.4% in Q4. That’s almost a full 1%. It’s not as bad at the Q1 numbers, but certainly not “cooling,” even if the headlines looked a hair better. The Fed doesn’t look at services alone, of course, but it’s where the stickiness lies. Weirdly, instead of interpreting the bad data as implying the Fed may not cut in September after all, the FX market went merrily hanging on the assumption it’s a done deal.

A ray of light comes from Goldman, which expects inflation to moderate in the critical shelter component. You can open a savings account at Marcus, Goldmans’ retail savings arm, and get a summary of its analysis to the big clients. 

Rhetoric and semantics are going to be critical in the Fed statement this week. Mr. Powell told the Europeans “we are almost there.” Some bettors are pulling for 50 bp in September and/or three cuts in all before year-end, which would put the Fed back on track where it started in December—three cuts in ’24. (Everybody likes to be right.)

Forecast

The prospect of the Fed cutting rates and perhaps cutting as much as 75 bp is probably another over-the-top exaggeration, but even so, two cuts this year should be a dollar headwind. It’s peculiar that we don’t’ see that yet, so what can be holding it back? Rate cuts elsewhere count. Robust US growth compared to struggling economies elsewhere. Stay tuned.  

Reasons for the Fed to cut rates

Avoid embarrassment from getting inflation wrong twice.

Normalize the yield curve.

Head off any recessionary tendencies.

Help housing via mortgage rates.

Help banks rollover commercial property loans.

Help the stock market, especially smaller companies (with debt).

Synchronize with the ECB (and Riksbank and SNB).

Help the current White House and/or avoid accusations of political bias if delayed to after the Nov election.

Avoid “higher for longer” morphing into “higher for too long”.

Political Tidbit:  The Wall Street Journal published a poll showing Trump (49) and Harris (47) = neck-and-neck (within the margin of error), a contrast to Trump’s big lead against Biden only a week ago. Once RFK Jr. is taken out, Harris does lead, albeit with the same margin of error issue. 

Harris has raised $200 million in under a week, a record high for any campaign ever, and perhaps tellingly, 66% came from first-time donors, most of them small. 

On the VP issue, the Trump team is said to have buyer’s remorse about Vance, who got himself tangled up promoting having children vs. the childless. He said those with children deserve a tax break. It shouldn’t take late-night comedians to point out, well, they do. It’s called the Child Tax Credit.

A high-ranking former Marine officer is circulating a diatribe against Harris, claiming she is a Marxist and had associated with every form of commie in the quest for voting rights and civil liberties. So we looked into it. Harris’ father is indeed a Marxist and author of an impenetrable book. The Economist magazine summarizes his career in nearly as impenetrable prose.

Bottom line, my father was a machinist but I can’t drive a screw without stripping it. This is “the sins of the fathers” we left behind. Besides, Harris was 7 when her parents divorced and she stayed with her mother. We doubt you can indoctrinate a 7-year old. We can’t find anything in Harris’ voting record or elsewhere that suggests she is a Marxist. More liberal than just about anyone else, but not the same thing. And besides, Marxism is not the same thing as Communism. Trump and Co. do not, of course, know that.

As for the civil rights movements infested with a fair share of pinkos, it was always like that, going back to the 1960’s. And before then, liberals were accused wholesale of being commies. Remember the MaCarthy hearing in the early 1950’s. In the end, three were discovered, and not by McCarthy.

It doesn’t mean everyone favoring civil rights is a pinko. That is just the same old false equivalence so often used in political dirty tricks. Another one—Harris has step-children but none of her own, so she is a childless cat lady. This is just plain stupid but getting rebuttals anyway (and she doesn’t have a cat). 

Harping on the Marxist thing, nobody has ever defined where capitalist-but-regulated slides into communism-all-regulated. Two not silly points: the definer of capitalism, Adam Smith, made a special note that banks could not be allowed to go fancy-free and need to be regulated for public welfare. Regulation is not necessarily antithetical to capitalism. That doesn’t mean we don’t have plenty of stupid regulations…

Libertarians, who claim to be against nearly all regulation, enjoy food that is not dangerous, police and firemen who protect them, clean water and air, roads and bridges that don’t fail, etc., all because of regulation. Marx said the source of ALL value is labor. (Capital is not people’s savings being put to work to generate economic value.) The capitalist system is unfair to labor and perpetuates poverty. Okay. Now name a socialist/communist country where labor is not poor. All systems exploit labor, starting in feudalism. Well, maybe not some Scandi countries, but income inequality is on the rise even in Sweden.

There are several income inequality databases, but we have a problem with all of them. Ther GINI coefficient is before taxes and benefits. How can that be realistic? Even the Palma index, measuring the share received by the richest 10% by the share of the poorest 40%, is before taxes and benefits. The maps don’t always make sense but here is one. The US started to have more income inequality than the other G7 majors starting in 1991 and accelerating big-time in 2019. Under Trump. 

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