According to reports, JPMorgan Chase and Citigroup are one of the few Wall Street giants that still expect the Federal Reserve to cut interest rates in July.
At the beginning of this year, it was widely predicted that the Federal Reserve would cut interest rates at least six times, but the process of reducing inflation was stalled, the labor market situation remained strong, and the market had to gradually compromise. Most major Wall Street firms abandoned their expectation of the Federal Reserve cutting interest rates before September a few weeks or even months ago.
At the end of May, economists from Goldman Sachs and Nomura Securities adjusted their forecasts for the first Fed rate cut from July to September, partly due to Federal Reserve officials suggesting that the threshold for rate cuts has been raised. For example, Federal Reserve Governor Christopher Waller stated in late May that good inflation data is needed for "a few more months".
The CME Federal Reserve observation tool shows that traders have almost ruled out the possibility of a rate cut in July. Currently, it is widely expected that the Federal Reserve will cut interest rates twice this year, in September and December, respectively.
However, in recent days, the reasons for early interest rate cuts have been strengthened: job vacancies and weak data on new private sector employment. The non-agricultural data to be released on Friday will provide clearer guidance for the market. According to media surveys, the median forecast for the May employment report by economists is 185000 new non-farm jobs, slightly higher than 175000 in April, but still at the lowest level in the past year.
Just look at non-agricultural data
"The only factor that propels people towards a rate cut in July is news of a significant weakening in the labor market. If we have consistent data, I think you will see people expecting a 'first drop in July'," said Greg Wilensky, US fixed income manager at Janus Henderson Investors
Citibank's Chief US Economist Andrew Hollenhurst said on Wednesday that the bank's expectations for the "first drop in July" depend on weak labor market data, including Friday. His team predicts that the number of non farm workers will increase by 140000, and the unemployment rate will rise from 3.9% to 4%.
Hollenhurst stated that the Federal Reserve's interest rate setting committee will hold its final meeting before July next week, and regardless of May employment data, it is unlikely to suggest that the Federal Reserve intends to cut interest rates in July.
He said that Federal Reserve Chairman Jerome Powell "will clearly reserve the possibility of interest rate cuts at all meetings. He may also emphasize that the committee is monitoring the data and will make decisions on a meeting by meeting basis."
Michael Feroli, Chief US Economist at JPMorgan Chase and his colleagues, stated in a previous report that they have maintained their forecast for a rate cut in July based on inflation data from April. Although the inflation data is still higher than the Federal Reserve's expectations, it is at least moving in the right direction.
"But we may need to see further cooling of labor market activity to be effective," they said. Xiao Mo estimates that the number of non-agricultural employment will increase by 150000 in May.