Source: Jin10 Data
Weak employment and housing market data are people's primary concerns about the tightening financial environment. If the June data provides more evidence, the Federal Reserve may unexpectedly take a dovish stance.
Despite the market's lack of expectations, an economist pointed out that as the economy begins to show signs of weakness, the Fed may cut interest rates for the first time in July.
Steven Blitz, an economist at GlobalData TS Lombard, said in a report last week that there was a 60% chance that Fed Chairman Powell would cut interest rates next month, surprising the market.
According to the Fed observation tool of the CME Group, the market expects a 10% chance that the Fed will cut interest rates at the July policy meeting. Most market participants expect the first rate cut to occur in September or November.
But Blitz wrote that the Fed's interest rate cut in July was to prevent an imminent economic recession because recent data showed signs of economic weakness.
Earlier, Powell reiterated that the Fed would make rate decisions based on data, so a recent interest rate cut is not necessarily impossible.
"Recent data suggest that if June job data are more similar to April than May, and June data generally as well, then the FOMC will take a dovish stance in its policy communication in July," Blitz said.
The US economy added 175,000 jobs in April, well below analysts' expectations. Following that, the May employment report was better than expected, but recent unemployment claims data have cast a shadow over the labor market.
In addition, recent housing data shows a significant slowdown in home construction activity.
Blitz said, "Housing starts slowed in May, especially for single-family homes, and this is not a one-time event. With inventory increasing and new home traffic dropping sharply, the degree has reached the level of economic recession."
The gloomy sentiment of home builders has also reduced expectations that home-building activity will soon catch up. Increasing supply of homes for sale, coupled with declining market sentiment, "suggests weakened new home construction in the second half," Blitz said.
This should be a concern for the Fed as it faces the risk of maintaining a too-tight financial environment for a long time and eventually causing an economic recession.
After hawks such as Kashkari and several other officials recently said the Fed may not cut interest rates until December, this risk has become increasingly evident.
"There is nothing more absurd than the current FOMC spokesperson announcing when the Fed will begin to lower interest rates. Data will tell them when the Fed will cut interest rates, not the other way around, and their understanding of the data is no better than the rest of us," Blitz said.
Recent data shows cracks in the housing and labor markets, meaning that interest rate cuts may occur faster than most people expect.
"I think there is a 60% chance of a rate cut in July. Economic recession is not an option."
Editor/Lambor