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U.S. Bond Market Week In Review: The Hawks Get Silenced

Hawkish sentiment was the norm at the Federal Reserve, guaranteeing a rate hike in the next few meetings. But Fed policy remains data dependent as their noted in their last policy statement: “However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.” From an analytical standpoint, we’re now looking for any event that would change the Fed’s hawkish bias. All data sans Friday’s report supported the hawks. But Friday’s jobs numbers were so negative that a June hike is probably off the table.

On Wednesday, the Fed released the , which once again painted a picture of a modest or moderately expanding economy:

Information received from the 12 Federal Reserve Districts mostly described modest economic growth since the last Beige Book report. Economic activity in April through mid-May increased at a moderate pace in the San Francisco District, while modest growth was reported by , , Atlanta, , St. Louis, and Minneapolis. Chicago noted that the pace of growth slowed, as did Kansas City. reported that economic activity grew marginally, while New York characterized activity as generally flat since the last report. Several Districts noted that contacts had generally optimistic outlooks, with firms expecting growth either to continue at its current pace or to increase.

Consumer spending was up modestly on balance in many Districts, though contacts in the Boston, Cleveland, Minneapolis, and Dallas Districts reported mixed or flat activity, and New York reported weakened sales. Many Districts reported modest growth in nonfinancial services. Manufacturing activity was mixed across Districts. Construction and real estate activity generally expanded since the last report, and the overall outlook among contacts in these industries remained positive. Overall loan demand was up moderately in all but one of the Districts that reported it, and many Districts reported steady to good credit availability. Crop conditions were promising in many Districts, but low commodity prices continued to put pressure on agricultural incomes. The energy sector remained weak. Employment grew modestly since the last report, but tight labor markets were widely noted; wages grew modestly, and price pressure grew slightly in most Districts.

The first paragraph provides an overview of each Fed district with the majority reporting a positive economic environment. Four districts — Chicago, Kansas City, Dallas and NY — reported slightly weaker growth, but none are in dire shape. The second paragraph contains an overview of each GDP component; again, all show modest increases. There were a few cautionary remarks: several districts saw somewhat weaker consumer sales, while manufacturing was mixed. But, on balance, the various economic sectors point to a continued modest expansion.

Price and unemployment claims also support the hawks. On Tuesday, the BEA released the latest person income figures, which contained the followed PCE price data:

The April PCE price index increased 1.1 percent from April a year ago. The April , excluding food and energy, increased 1.6 percent from April a year ago.

Price increases are approaching the Fed’s 2% target. And on Thursday, the Department of Labor reported initial claims for unemployment dropped a third consecutive week, this time to 267,000. Several weeks ago, this number increased to just shy of 300,000, which caused some analysts to issue cautionary comments. It’s likely the recently settled Verizon Communications Inc (NYSE:) strike had a disproportionate impact on the number. But the now lower number clearly supports the hawks.

And then we come to Friday’s report, with a 38,000 headline number – a very large miss. Both manufacturing and service sector growth showed sharp declines. The previous two months were lowered by a combined 59,000. And while the unemployment rate declined to 4.7%, people leaving the labor force were the primary reason for the decline. There was nothing good in the report. In fact, it was so negative that a June hike is probably off the table.

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