Economic data weakens, but that could embolden Fed hawks

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The minutes of the Federal Reserve’s May meeting gave investors a pretty clear roadmap for the summer.

The minutes, released Wednesday afternoon, painted a picture of a heavily inflation-biased FOMC, with rate hikes of 50 basis points in the June and July meetings.. But some members also indicated that price pressures may not worsen.

Gathering of shares: The market seemed to view the minutes as more dovish than hawkish. Half-point hikes were already forecast for the next two meetings and there was no mention of the 75 basis point moves that had become the base case for a few Wall Street banks in late April.

The S&P 500 (NYSEARCA: SPY) rose about 1% to end the session and S&P (SPX) futures are up again this morning. The Nasdaq 100 (QQQ) gained 1.5% on Wednesday and futures (NDX:IND) were up another 1% today.

Treasury yields (SHY) (TBT) (TLT) continue to decline today.

Data Dependency: “We believe that after the July meeting, the Fed will likely become more ‘data dependent’ when it comes to rate hikes, which essentially means that the policy trajectory after July will depend on the trajectory of the inflation and progress toward correcting supply/demand imbalances in the labor market,” said Bob Miller, bond strategist at BlackRock.

There are already signs that the US economy is weakening. Of the last 19 major economic indicators, 13 missed economists’ expectations, Nomura noted.

The question is whether this will cause the Fed to pause, which the bulls are hoping for, or will it strengthen the central bank’s resolve.

If there are signs of falling inflation and improving labor market imbalances “the Fed is gaining some breathing room and can move policy adjustments to 25 basis point increments, while continuing some something in the estimated range of neutral,” Miller said.

Pantheon Macro economist Ian Shepherdson says the door is still open for a smaller rise in July as the minutes show policymakers “appear utterly oblivious… to the reversal in housing demand, which is evident in the data on mortgage applications since the turn of the year.” That will change in the June minutes, he added.

But Nomura strategist Charlie McElligott said those hoping for a break from the Fed would likely be disappointed, noting Fed Chief Powell’s willingness to endure “some pain” to achieve price stability.

“I think if anything, the Fed is seeing the results of its (Financial Conditions Index) tightening campaign through these general measures ‘slowing down’ and may in fact become gradually ’emboldened’ to continue PUSHING on his hiking trail until he sees the “whites of the eyes” of sustainably lower inflation as opposed to the notion of “pausing and hoping” that inflation data are falling – a view increasingly shared by some in the market,” he said.

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