Bond traders appear certain that the Federal Reserve is on the brink of its first rate cut since 2008. The biggest question, as the market girds for a barrage of speeches by policy makers, is what comes next.
Chairman Jerome Powell last week
opened the door to a July cut, stressing a cooling
global economy and trade friction as drivers. That leaves investors monitoring U.S. retail sales figures this week and the latest economic data out of Europe and Asia to fine-tune wagers on the extent of cuts for the rest of 2019.
Futures imply a quarter-point July Fed cut and a total of almost 70 basis points of easing for all of 2019. Last week showed how shifting expectations for the Fed’s path amid thin summer trading can jolt markets: The yield curve from 2 to 10 years steepened the most since October as rate-cut bets gained momentum while June inflation data beat forecasts.
“Global growth and domestic inflation is really the key for the Fed now,” said Gennadiy Goldberg, a senior U.S. rates strategist at TD Securities. “There’s a very low bar for the Fed to cut once or twice, but there’s a lot of possible permutations after that.”
This week is the last chance for policy makers to sway the market before the Fed’s standard quiet period begins in the lead-up to its July 30-31 meeting. Powell speaks in Paris, and New York Fed President John Williams is among others scheduled to appear.
The prospect of imminent Fed easing and reports showing above-forecast U.S. inflation drove the curve steeper last week. The gap between two- and 10-year notes expanded about 10 basis points, to 27, back toward the year’s peak levels. Two-year yields fell to 1.85%, while 10-year rates rose to 2.12%.
TD predicts further steepening in the next three to six months. It forecasts quarter-point cuts in July, September and October, followed by 75 basis points of reductions in 2020.
There’s another reason to expect longer maturities to lag: Auctions last week showed
investors starting to balk at yields near the lowest this year as the Fed signals it’s preparing to add stimulus.
“Front-end yields can’t really rise given a July cut is baked in the cake,” said John Briggs, head of Americas strategy at NatWest. “But given positioning and the recently poor 30-year auction, we could see more selling pressure in the long-end that causes more steepening.”
The 10-year yield may rise this week to the next support level, at about 2.2%, he said. NatWest forecasts quarter-point cuts in July and September and then for the Fed to stand pat.
It’s not all about the Fed this week. Traders are also assessing the looming risk around the nation’s debt limit, after Treasury Secretary Steven Mnuchin warned that the government may
run out of cash in early September if Congress doesn’t raise the U.S. borrowing authority.
Investors are signaling concern. Treasury bills maturing around mid-September through early October yield more than later maturities as buyers avoid securities that could be at risk of non-payment if Congress doesn’t lift or suspend the debt cap.
What to Watch
- Powell’s appearance and June retail sales are among the week’s highlights. Here’s the economic calendar:
- July 15: Empire manufacturing
- July 16: Import/export prices; retail sales; industrial production; NAHB housing; business inventories; Treasury International Capital flows
- July 17: MBA mortgage applications; housing starts; building permits; Fed Beige Book
- July 18: Philadelphia Fed business outlook; jobless claims; Bloomberg consumer comfort; leading index
- July 19: University of Michigan sentiment
- It’s a busy week for Fed speakers:
- July 15: New York Fed’s Williams speaks at a Libor briefing
- July 16: Atlanta Fed’s Raphael Bostic; Fed Governor Michelle Bowman; Dallas Fed’s Robert Kaplan; Powell at Bank of France dinner; Chicago Fed’s Charles Evans
- July 18: Bostic again, and Williams on monetary policy
- July 19: St. Louis Fed’s James Bullard; Boston Fed’s Eric Rosengren
- It’s a week of bills and TIPS auctions:
- July 15: $36 billion of 3-month bills; $36 billion of 6-month bills
- July 16: $26 billion 52-week bills
- July 18: 4-, 8-week bills; 10-year Treasury Inflation-Protected Securities