The Fed made no change to the restrictive policy rate but did announce tapering in the pace of balance sheet runoff starting in June. The jobs report and April PMI readings indicate economic slowing.
As expected the Federal Open Market Committee (FOMC) left the policy rate unchanged with an upper range of 5.5% following the May 1 meeting. Quantitative Tightening (QT) will continue but at a slower pace. Treasury run-off will decrease to $25B per month from $60B. Mortgage Backed Securities (MBS) balances will continue to shrink by $35B each month.
I found very little new from the FOMC statement or Powell’s implementation conference comments. Inflation continues to run well above the 2% target rate despite restrictive monetary policy. Market expectations now project a first -1/4 point cut in September with the policy rate falling to 5% by year end.
The April Employment Situation summary from BLS (May 3) reported 175k net new jobs in April. Prior months revisions totaled -22k. Employment gains were most prevalent in the Services sector particularly in Health Care and Social Assistance (+87k). April average hourly earnings increased 0.2% from March which was less than the rate of consumer price increases.
Final April PMI surveys showed the U.S. economy decelerating from its 1st quarter growth rate. The S&P Global April U.S. PMI (May 3) composite index was 51.3 while other PMI surveys correlated to economic contraction in the period. S&P Global MI economist commented, “overall business activity grew in April at the slowest rate seen so far this year. At current levels, the PMI indicates that GDP is expanding at a modest annualized rate of approximately 1.5% so far in the second quarter. Demand has weakened, as signaled by the first fall in new orders for goods and services for six months, in part a reflection of both businesses and households adjusting to higher costs and the prospect of higher for longer interest rates. Business optimism has likewise cooled, dropping to the lowest since November, and companies are taking a more cautious approach to staffing levels.â€
Markets interpreted the weaker jobs and PMI data as increasing the probability of FOMC rate cuts. Bank stocks extended their 3-week rally. I measure trailing 52-week average change and volatility in mid-cap bank stock prices. This average was negative for most of the past 2 years accompanied by high volatility. More recently the measure has turned positive with volatility falling. If the trend continues, bank stock investors may soon be conditioned to expect regular weekly gains. This would be a welcome change in sector momentum.