Baker Market Update
2024-05-10

This week has been fairly quiet on the data front, enough to bring comments from this week’s round Fed speakers even more into the spotlight. Last Friday’s non-farm payrolls miss as well as wage growth ebbing below 4% seems to have switched much of the narrative around Fedspeak back to a central bank that is adequately restrictive vs. one that may be considering further interest rate hikes.

New York Fed chief John Williams said Monday that the Fed will lower its interest rate target at some undefined point. "Eventually we'll have rate cuts" but for now monetary policy is in a "very good place." Boston Fed President Susan Collins continued the cautious tone in her comments on Wednesday and downplayed any need to raise interest rates further. She said the current setting of monetary policy would slow the economy in the way necessary to get inflation back to the Fed's 2% target. On Thursday, San Francisco Fed chief Mary Daly commented that she was still in "wait-and-see mode" and added, "We've had three stubborn months of data, but I still see monetary policy is working… I do think that we're seeing, in a really positive way, disinflation." Even after Minneapolis Fed president and known hawk Neel Kashkari said all policy options were still on the table in getting inflation back in the bottle, markets seemed to dismiss his comments as those of an outlier and non-voting member of the Fed’s policymaking committee.

The biggest data release of the week came on Thursday when an unexpected jump in weekly jobless claims surprised markets, suggesting a potential swifter cooling of the labor market and re-igniting Fed easing hopes. Layoffs appear be increasing in the U.S. as jobless claims surged to 231k for the week ending May 4th (vs. 212k survey). It is too early to tell whether this foretells persistent weakness in the labor market or whether this is merely a catch-up move driven by seasonal factors. However, if the unemployment rate rises to 4.0% (currently 3.9%) over the next two months ahead of the Fed’s next meeting, the committee could be compelled to cut by July. Fed funds futures are currently 90% priced in for a quarter-point rate cut by September.

Market attention will undoubtedly focus on economic data next week as we have several important inflation indicators set to be released. The week will kick off with the Producer Price Index (PPI) on Monday, the Consumer Price Index (CPI) and Retail Sales on Tuesday, and housing, industrial, and manufacturing data to round out the week. Markets will also be closely watching Thursday’s Initial Jobless Claims reading for any sign of a continuing trend in labor market weakness. Have a great weekend and Happy Mother’s Day!