Manufacturing weakness points to rate cut next month

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The markets are pricing in a 25 basis point Fed rate cut in July after Thursday’s indicators showed continued manufacturing weakness.

A gauge of Philadelphia area manufacturing growth plunged, giving analysts another data point to consider as they pored over the Federal Open Market Committee’s statement for clues on how much and when the Fed will actually cut rates.

While any cuts will be data dependent, Berenberg Capital Markets chief economist U.S., Americas and Asia Mickey Levy and U.S. Economist Roiana Reid write in a note they see a 25 basis point cut in July, followed by another in October, much as the markets do.

“We continue to stress that these rate cuts would be the Fed’s insurance policy against U.S. and global industrial production and trade slowdown, trade tensions, the slightly inverted yield curve, persistently low inflation, and receding inflation expectations.”

Although a dovish tweak in language was expected, a commentary from Morgan Stanley Research said, “June’s SEP showcasing material markdowns in Fed Funds target projections offered a bit of a surprise” as seven participants expect cuts of 50 basis points by yearend although the median dot suggested no rate change. In a separate note, the group predicted "a 50bp cut in July that is delivered with flexible language, thereby allowing the Fed to be nimble in the event that 50bp is not enough to offset the downside risks to the outlook."

Scott Anderson, chief economist at Bank of the West Economics, said, “We cannot rule out the possibility of a July rate cut, but will keep our forecast of a quarter percentage point cut at the September meeting with two additional quarter point rate cuts falling in 2020 as U.S. economic growth shows more signs of slowing below potential.”

The Federal Reserve Bank of Philadelphia’s June Manufacturing Business Outlook Survey confirmed the Empire State Manufacturing Survey’s depiction of weakness in the sector. While the Philly Fed survey’s diffusion index for current general activity remained positive, suggesting expansion, it was barely so at just 0.3, down from 16.6 in May. “Most of the survey’s future activity indexes improved but continue to reflect muted optimism for the remainder of the year,” the Fed said.

Leading Economic Index
The Conference Board's Leading Economic Index was flat in May, signaling "a moderation in growth towards 2% by year end," according to Ataman Ozyildirim, director of economic research at the think tank.

Economists polled by IFR Markets expected a 0.1% rise in the leading index.

Consumers’ outlook and financial conditions offset manufacturing weakness and lower stock prices, he said.

The coincident index rose 0.2% in the month, while the lagging index fell 0.2%.

Jobless claims
Initial jobless claims fell to a seasonally adjusted 216,000 in the week ended June 15 from an unrevised 222,000 the week before. The number of continuing claims dropped to 1.662 million in the week ended June 8 from 1.699 million the week before. Economists expected claims to fall to 220,000 in the week.

Current account
The U.S. current account deficit fell to $130.4 billion in the first quarter from a revised $143.9 billion in the prior three-month period, according to Bureau of Economic Analysis.

The deficit represents 2.5% of current-dollar gross domestic product in the quarter, down from 2.8% in the prior quarter.

As a result of tax changes that took effect last year, U.S. companies repatriated $100.2 billion of foreign profits in the quarter, down from a revised $146.6 billion in the prior quarter.

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Monetary policy Economic indicators Manufacturing industry Jerome Powell Federal Reserve FOMC