Markets Rally Despite Weaker Economic Data

The Fed’s aggressive monetary stance seems to be finally impacting the economy, and markets believe that interest rates are indeed on a downward path. US job openings fell to a three-year low in April, a trend that looks set to continue as the labor market continues to normalize. The data caused the bond market to reassess the view that the Federal Reserve will keep interest rates higher for longer. As inflation continues to gradually moderate, so has the economy. Recently, the second estimate of first quarter GDP growth was revised down from a preliminary 1.6% to 1.3% last week. Irrespective of weaker economic data, the economy continues to grow albeit at a slower pace.

Capital markets appreciate lower cost of financial capital, and the S&P 500 continues to disappoint the bears by hitting new all-time highs based upon the notion that bad news for the economy is good news for financial assets. The September 18th FOMC meeting is still viewed as the earliest date for a lower rate, with a nearly 60% implied probability of a rate cut. The market also sees higher cumulative rate cut probabilities later in the year. Inflation has gradually declined to an acceptable rate even though we haven’t had the recession many economists insisted was necessary. The jobs report due tomorrow may provide fresh hints about the state of the economy and the path of monetary policy. Little change is expected in the May report compared to April, with a market estimate of 185,000. In April, nonfarm payrolls fell to 175,000 down sharply from 330,000 in March, its lowest level in six months.