Source: Cailianshe Author: Xiaoxiang

With Jerome Powell's biannual Congressional testimony and the much-anticipated June CPI data about to be released this week, the topic of whether the Federal Reserve will cut interest rates in the third quarter is undoubtedly going to be the focus of attention among industry insiders in the coming days.

Last week, the US Treasury bond market finished strongly, with the 10-year US Treasury yield falling by about 20 basis points for the week to close near its lowest level since the end of June. Meanwhile, the S&P 500 index of US stocks posted its 34th highest close of the year on Friday, suggesting that the stock and bond markets are currently presenting a "bright and dazzling" scene. This scene was further highlighted on Friday when non-farm payroll data showed that the US labor market was softening, further enhancing market expectations that the Federal Reserve would begin to cut interest rates in September.

Data released by the US Department of Labor on Friday showed that the number of non-farm jobs rose by 206,000 in June, slightly higher than the 190,000 estimated by economists surveyed by the media. However, non-farm payroll data for the previous two months was significantly revised downwards - the number of new jobs added in May was revised down from 272,000 to 218,000, and new jobs added in April were revised down from the previous figure of 165,000 to 108,000. The unemployment rate in June also rose to 4.1%, higher than the expected 4.0%.

Recently, the labor market has been the focus of the Federal Reserve's debate on when to begin lowering interest rates from their near 20-year highs, and a series of data in recent weeks seems to suggest that the labor market is tilting more towards supporting the Federal Reserve's interest rate cut in the second half of the year.

"This isn't a bad report, but because the previous months' data were revised down significantly, it still shows the cracks and weaknesses beneath the surface," said David Wagner, investment portfolio manager at Aptus Capital Advisors. "This makes it possible for the Federal Reserve to lower interest rates at its September meeting."

Gregory Faranello, head of US interest rate trading and strategy at AmeriVet Securities, also commented, "This is actually a favorable data for the US bond market. The Federal Reserve will keep a close eye on the job market performance."

Data from the derivative market also showed that traders' bets on interest rate cuts further increased after the non-farm payroll data was released. They currently have about a 100% probability of two interest rate cuts this year and believe that the probability of Jerome Powell and his colleagues cutting interest rates as early as September is around 76%.

Is the Federal Reserve about to lay the groundwork for an interest rate cut?

In a way, if the Federal Reserve really wants to lay the groundwork for an interest rate cut in September, the upcoming Jackson Hole central bank annual meeting from the current month to August could be the best "preparation node". Powell's two back-to-back congressional testimonies on Tuesday and Wednesday this week, as well as the US June CPI data on Thursday, are also likely to further impact market expectations for interest rate cuts.

Many insiders expect Powell to face sharper questioning from congressional lawmakers this week about why the Federal Reserve does not want to lower lending costs.

Last Friday, the Federal Reserve put out its monetary policy report for the first half of 2024 on its official website. The Federal Reserve outlined its assessment of the current state of the US economy, emphasizing the need and importance of its policy independence in the context of slowing inflation. The report also stated that it would not adjust the interest rate range until it had sufficient confidence in achieving the 2% inflation target, and that monetary policy decisions would continue to be based on data, economic prospects, and risk balance.

However, in recent public speeches, Powell has gradually revealed a relatively more dovish side. For example, at the Sintra Annual Forum hosted by the European Central Bank on the previous Tuesday, Powell, while still refusing to give any specific guidance on the timing of the first interest rate cut, also made it clear that the Federal Reserve had made considerable progress in bringing inflation back to its policy target. Powell said, "The recent (inflation) data, and the previous data (to a lesser extent), both indicate that we are returning to the path of falling inflation. Before we begin to loosen monetary policy, we want to be more confident that inflation is continuing to fall and approaching 2%."

"This isn't a bad report, but because the previous months' data were revised down significantly, it still shows the cracks and weaknesses beneath the surface," said David Wagner, investment portfolio manager at Aptus Capital Advisors. "This makes it possible for the Federal Reserve to lower interest rates at its September meeting."

Jeff Klingelhofer, co-head of investments at Thornburg Investment Management, said, "I believe there is still room for U.S. bond prices to rise. Judging from what Powell has said recently, his inclination to begin a mild easing cycle is strong, the labor market is returning to a better balance, and inflation is facing downward risk. The economy may slip into a recession."

Apart from Powell's two testimonies, investors should also pay attention to whether the US CPI data this week will bring more good news. Industry surveys currently generally predict that the overall CPI annual rate for June in the US will fall from 3.3% to 3.1% from the previous figure, while the monthly rate may rebound to 0.1%; core CPI annual and monthly rates will remain at 3.4% and 0.2%, respectively.

Stephen Juneau, an economist at Bank of America, wrote in a CPI outlook report, "After a flawless CPI report in May, we expect the June report to further boost people's confidence (in the downward trend of inflation)."

Editor/Lambor