So…. The market is starting off a bit down today. And why is this so? It is because the June job creation numbers are too good. Keeping track of all of the contradictions in investor behavior and fundamental analysis can be an exercise in futility.
To explain, the Fed ordinarily cuts rates to lower the cost of credit, thus boosting economic activity; this action is ordinarily a response to an economic pullback. The Fed can’t always utilize minimal rates, since cheap credit is inflationary, and the Fed’s explicit mandate is to stabilize prices. As of today, inflation is currently below the Fed’s implicit target of 2%, so they might allow a cut rate (or two) to try and prevent a slowdown in growth (which most economists say is in our imminent future) from regressing into a full-on retraction of growth.
Through June, the reported data (usually made of lagging indicators) and equity & bond market returns have been universally good. It appears reckless to cut rates given the absence of any measured threat. In other words, the Fed really needs an excuse to cut rates despite the political pressure from the White House.
Last week, it looked like the Fed was getting an excuse to cut rates; the May job creation numbers were pretty weak. Depending on the latest report or estimate you follow, job creation was up in the 75,000 – 100,000 range. Along with other factors including the relative pullback from the temporary tax-bill boost of 2018, an inverted yield curve, and ongoing trade tension stifling global growth – the stars were aligning for the Federal Reserve to cut interest rates.
That base case fell apart last Friday when the June job creation numbers came out. The Bureau of Labor Statistics reports 224,000 new jobs were added to the economy in June. That challenges the narrative of an imminent growth pullback, thus stifling the ability of the Fed to cut rates.