As Economy Heads to 'Stall Speed,' an Upcoming Report Will Be Pivotal
The economy is clearly slowing and some critical data expected this week will have a major impact on where policy goes next.
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After broaching the 4.6% threshold briefly early last week, the 10-Treasury yield has moved lower by nearly 30 bps, which is a sharp move for this asset class. The trigger for the pullback in interest rates are increasing signs of a cooling economy. Noted economist David Rosenberg stated late last week that the economy seems to have hit "stall speed" and could weaken materially from here.
GDP growth forecasts seem to be getting significantly slashed in recent days. The Atlanta Fed’s GDPNow cut their forecast for second-quarter GDP growth from 2.7% all the way down to 1.8% late last week. This followed the second estimate of first-quarter GDP being revised down to 1.3% from 1.6% a week ago. Weakening consumer demand is getting the lion’s share of the blame for the most pessimistic numbers.
Friday's upcoming BLS jobs report is likely to draw very close scrutiny. April’s BLS numbers showed just 175,000 positions created for the month while the unemployment rate creeped up by .1% to 3.9%. The was the lowest level of job creation in six months and was significantly under consensus estimates. The JOLTs job opening report on Tuesday also was solidly under expectations and at the lowest level in more than three years.
One of the most surprising readings in recent days is that corporate profits fell 1.7% on a year-over-year basis in the first quarter. The consensus was anticipating a nearly-4% gain. This is not something you would expect to see in an economic expansion especially given all the election year rhetoric around corporate price gauging. Given the struggles that I am seeing within the small business community here in Delray Beach, Fla., as well as commentary around the struggling consumer that was delivered within Q1 results and guidance from such notable names as Home Depot HD, Starbucks SBUX, Target TGT and other well-known consumer names; maybe this shouldn’t have been such a shock.
If we get a weaker-than-expected BLS jobs report on Friday, hopes for a cut in the Fed funds rate in July will likely increase. However, this presents a dilemma for the central bank that could find itself in the proverbial purgatory known as being between a rock and a hard place. Members of the FOMC have consistently stated that they need to see several months of confirming data that inflation is on the next leg down towards the central bank’s official target of 2%.
However, if the jobs report comes in considerably weaker on Friday, I would expect to see growing hopes and calls for Chairman Powell to start to cut rates as soon at the next FOMC meeting in July. That will put him in the unenviable position of either maintaining the current Fed funds levels and doing nothing about a clearly cooling economy in an election year or cutting rates and losing some considerable credibility on the inflation front. In that scenario, my guess is the Federal Reserve will maintain rates but offer up to the markets considerably more dovish commentary about future rate cuts.
The bottom line is that the economy is clearly slowing. The question for investors is if this is a "blip" or whether we are getting close to stall speed. The market will be provided with more tea leaves to read around this subject when the May BLS report comes out early Friday morning.
At the time of publication, Jensen had no positions in any securities mentioned
