Fed's hand may be forced as disinflation builds, Macquarie says
'We think that the Fed will lean toward a more 'dovish' message on June 17 than it did on May 7, and the prospect for a rate cut in 2025 has strengthened a bit,' Macquarie strategists wrote, pointing to the recent decline in US inflation and signs of a weakening labor market.
While the April JOLTS report showed a modest pick-up in job openings, Macquarie cautions that other indicators—including today's weak ADP report and a drop in private-sector quit rates—signal the US labor market is losing momentum. 'The improvement in April openings seemed to contradict the poorer hiring signals from the Fed's recent regional surveys, the decline in job security measures in consumer surveys, and even third-party surveys of job openings,' the strategists said, adding that the ADP report showed a mere 37,000 in net hiring.
Macquarie warns not to put too much weight on the JOLTS report, noting, 'we shouldn't take the JOLTS report from yesterday too seriously, lest we be surprised by weakness in this Friday's May employment report.' For the Fed, the unemployment rate remains the 'paramount single driver' for its disposition toward rates, and any break above the recent 4.1%-4.2% range could be pivotal.
On the inflation front, Macquarie sees underlying price trends in the US as 'again disinflationary,' especially after the latest PCE inflation report. 'We think that with the June 18 FOMC meeting, some of the Fed's caution about cutting the Fed Funds rate target will start to fade, as the Fed considers that—if we abstract from the tariffs—underlying price trends in the US are again disinflationary,' they wrote.
Tighter credit conditions are also weighing on the outlook, as banks continue to tighten lending terms amid policy uncertainty and mark-to-market losses on Treasury holdings. 'Much of this, we think, is being driven by a suppression of consumer credit, as banks tighten lending terms,' Macquarie said.
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