If the world hasn’t been completely turned upside down, the sports world has certainly lost its axis. At the time of writing, India was scheduled to play Pakistan in the Cricket World Cup just down the road at Citi Field in Queens, New York City, while the city’s New York Mets were scheduled to take on the Philadelphia Phillies in London.
If the sports schedule isn’t already chaotic enough, consider the latest jobs report: The Labor Department announced on Friday that nonfarm payrolls rose by 272,000 in May, about half what economists had expected, but the unemployment rate rose to 4.0% last month, from 3.9% in April.
The employment figure comes from a business survey, while the unemployment rate comes from a separate, much smaller, survey of households. But recent economic reports have presented a kind of economic Rorschach test, with some fairly forceful voices arguing that a recession is already underway, while record-high stock markets suggest an economic boom.
Other indicators paint a similarly ambiguous picture: The Institute for Supply Management’s latest reading for May showed manufacturing contracting for a second straight month, but the expansion was stronger than expected, while the Atlanta Federal Reserve Bank’s GDPNow estimate for gross domestic product growth in the current quarter has fluctuated over the past month from over 4% to under 2% to back up to over 3%.
Via media It’s an unpopular path these days, but it’s one the Fed must take. For the time being, it means maintaining the status quo, and the Federal Open Market Committee is almost certain to leave the target range for the federal funds rate unchanged at 5.25% to 5.50% when it meets on Wednesday. More importantly, the committee will update its outline of the economic outlook for the first time since March, which will likely include an update on its outlook for the remainder of 2024, the next two years and beyond.
Advertisement – Scroll to continue
In particular, investors will be closely watching the FOMC’s outlook for the federal funds rate target and the so-called dot plot graph of the year-end federal funds rate expectations of the seven Fed governors and 12 regional bank presidents (only five of whom have policy votes each year). The March SEP showed the median federal funds rate at 4.6% at the end of 2024, with three quarter-point cuts to the rate by then.
Given the timeline and data, the new SEP will likely see only two quarter-point cuts through December. The December median would rise to 4.8% from 4.6% previously, with just a few dots shifting. And after Friday’s better-than-expected May payroll growth, the Fed Funds futures market is now predicting a 55% chance of one rate cut by the end of the year and a 45% chance of a second cut, according to the CME FedWatch site.
The May employment report reversed much of the decline in Treasury yields that began the week on the back of weak ISM manufacturing data and lower oil and copper prices, but the S&P 500 and Nasdaq Composite ended the week just below their records, even as fading expectations of lower interest rates weakened the tailwind for stocks.
Advertisement – Scroll to continue
While investors look to the Fed for clues about how the stock and bond markets are performing, it is the central bank that drives much of the U.S. economy. The latest data released by the Fed on Friday showed that U.S. household net worth rose by $5.1 trillion, or 3.3%, in the first quarter. More than half of that increase was due to rising holdings of stocks and mutual funds. And Commerce Department data cited by The Wall Street Journal showed that annualized income from interest and dividends rose to $3.7 trillion in the first quarter, up about $770 billion from four years ago.
While the economy is traditionally thought to drive financial markets, rising investor wealth and incomes appear to be a key stimulus to the economy, all but eliminating the need for the Fed to cut interest rates this year, even with mixed data.
Write Randall W. Forsyth randall.forsyth@barrons.com
