As we have repeatedly mentioned in the past few weeks, the divergence pattern in the macro fundamentals of the United States in the past few weeks has been: the US economic data has generally been sluggish, supporting the Federal Reserve to lower interest rates earlier this year; However, Federal Reserve officials have always been hawkish in their rhetoric, attempting to maintain high interest rates at current restrictive levels.
However, at the beginning of this week, a subtle change seems to have occurred: the dovish officials of the Federal Reserve have clearly increased the decibel of their speeches
The two regional Fed chairpersons who appeared on Monday - Chicago Fed Chairman Goolsby and San Francisco Fed Chairman Daley - clearly showed a subtle shift in tone. Both officials mentioned the downside risks currently facing the US economy and labor market, and believed that as long as inflation does not fluctuate, the Federal Reserve should be able to lower interest rates.
Chicago Fed Chairman Goolsby said on the same day that he expects US inflation to further cool down, paving the way for the Fed to start cutting interest rates earlier. Although Gullsby did not disclose information about the timing of interest rate cuts, he pointed out that policymakers do need to consider whether the decision to maintain short-term interest rate targets at the current high level is appropriate.
Gullsby said there are already "several warning signals" on the economic front - consumer spending seems to be cooling, there has been an increase in recent applications for unemployment benefits, and there has been a significant surge in consumer credit card debt default rates.
"If there are several more good inflation data like the May CPI report, and the economic situation further slows down, then you have to start questioning whether we should continue to adopt the same restrictive measures as before," Gullsby pointed out.
Coincidentally, San Francisco Fed Chairman Daley also warned on Monday that the US labor market is approaching a turning point, and further slowdown may mean an increase in unemployment.
Daley, who has the right to vote on monetary policy this year, said that in order to bring inflation back to the central bank's target level of 2%, it may be necessary to curb demand, which could put pressure on the labor market. Although the current employment market is in good condition, it is no longer "foam".
Daley believes that inflation is no longer "the only risk we face right now", "a slowdown in the future labor market may lead to higher unemployment rates because companies not only need to adjust job vacancies, but also need to reduce actual job positions."
Daley urged decision-makers to remain vigilant and open to various economic scenarios that may arise. She believes that "appropriate policies must be conditional", and if inflation declines slower than expected, it is appropriate to maintain higher interest rates for a longer period of time. If inflation drops rapidly or if the cooling of the labor market exceeds expectations, it is necessary to lower interest rates.
Although the two officials mentioned above may not have been hawkish in their past positions within the Federal Reserve (Goolsby belongs to the dovism, and Daley belongs to the centrist), they have also issued warnings about the downside risks facing the US economy, which clearly still deserves attention from investors.
Before these two officials made the aforementioned remarks, several Federal Reserve officials made relatively more hawkish statements last week, emphasizing the need for more evidence of inflation cooling before interest rate cuts. In the past year, Federal Reserve policymakers have maintained borrowing costs at 20-year highs, and they seem not in a hurry to cut interest rates.
In the bond market, the yield of US Treasury bonds with different maturities generally weakened further on Monday. As of the end of the New York session, the 2-year US Treasury yield fell 1.5 basis points to 4.734%, the 5-year US Treasury yield fell 2.5 basis points to 4.259%, the 10-year US Treasury yield fell 2.7 basis points to 4.237%, and the 30-year US Treasury yield fell 3.6 basis points to 4.366%.
It is worth mentioning that so far this month, the benchmark 10-year US Treasury yield has cumulatively decreased by more than 25 basis points, indicating a fierce backlash from bond market bulls in recent weeks. As shown in the figure below, the decline in US bond yields is in sync with the downward trend of Citigroup's US Economic Surprise Index.
This also indicates to some extent that even though Federal Reserve officials have been hawkish in their recent rhetoric, a series of poor economic data performances are already enough to drive a rebound in US bond prices. If more dovish voices can emerge within the Federal Reserve in the future, then the rebound wave in the bond market is likely to provide further assistance.
John Luke Tyner, Head of Fixed Income and Portfolio Manager at Aptus Capital Advisors, said, "The market is expecting the Federal Reserve to cut interest rates at some point in time. However, to make interest rates fall significantly, it will require significant economic damage."
Looking ahead to the rest of the week, investors will closely monitor Thursday's final US Q1 Gross Domestic Product (GDP) data, as well as Friday's more important May RCE price data, for more clues on the Federal Reserve's next steps. The Federal Reserve is currently trying to fight inflation without triggering an economic recession.
"I think there will be some wait-and-see sentiment in the market. Friday's (PCE Price Index) inflation data will be the most important data for this week," said Mona Mahajan, senior investment strategist at Edward Jones. "Otherwise, this week will be relatively calm, which seems to have been reflected in the market."