Chart of the Week
The Fed raised interest rates to a top-end range of 5.25% last week, a total increase of 5.00% in the last 15 months. Most forecasters believe this was the last interest rate hike of the cycle, and the Fed Chairman hinted at a pause. The next move will depend on how inflation, employment, and the banking system evolve. Markets have begun to price in interest rate cuts, as shown below. Based on history, we see an interest rate cut on average 7 months after the last hike, with a range for the first cut being one week to 14 months. The Fed is in sufficiently restrictive policy and prefers to remain on hold, well above the long-term neutral rate, which estimates to be 2.50%.
What We’re Reading
Some Things I Think – Morgan Housel
You’ve Heard About Behavioral Finance. But What About Physical Finance? – Institutional Investor
Commercial Real Estate: Fundamentals Still Matter – CBRE
The Chaos Machine: The Inside Story of How Social Media Rewired Our Minds and Our World – Next Big Idea Club
Podcast of the Week
A Conversation with the Fed Whisperer, Nick Timiraos – Forward Guidance
Last Week
For the 13th month in a row, the monthly payroll report was higher than expected. The unemployment rate fell to 3.4%, with 253,000 jobs added. There were negative revisions for the prior month. Services data showed expansion while manufacturing contracted in April. This earnings season has been positive, with 86% of the S&P 500 companies reporting and 78% beating expectations. The average earnings report was higher than expected by 7%.
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The Week Ahead
On Wednesday, we will see the monthly consumer price index report. The expectations are for above-average monthly levels of 0.4%. Later in the week, consumer sentiment data will be a key focus.
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