Chair Powell Leaves the Door Open for Earlier Rate Cuts

Yields decline again following weak economic data, Powell comments. The recent Treasury rally continued today following weak consumer confidence data and relatively dovish comments from Chair Powell. Yields fell 1-5 bps across the curve, with 2-year and 10-year yields now at 3.83% and 4.30%, respectively, their lowest levels since early May. Fed funds futures are now pricing a 25 bp rate cut as 19% likely in July, while a move is nearly 100% priced in by the end of September.  Meanwhile, equities soared on de-escalation between Iran and Israel, with the S&P 500 and NASDAQ up 1.11% and 1.43% respectively.

Powell signals that the Fed could opt for earlier rate cuts. After Fed officials Waller and Bowman argued over the past few days that the Fed could resume rate cuts in July, Chair Powell added slightly to the momentum. He said today that, “If it turns out that inflation pressures do remain contained, then we will get to a place where we cut rates, sooner rather than later.” However, he did not commit to a particular FOMC meeting, and he caveated that, “I don’t think we need to be in any rush because the economy is still strong.” The comments were neutral, reflecting great uncertainty in the current environment.

Fragile Israel-Iran truce holds steady, for now. Just hours after President Trump announced a ceasefire between Israel and Iran, reports emerged that Israel had detected a missile launch from Iran, in violation of the agreement. In response, Israeli Defense Minister Israel Katz said the country would respond “forcefully” with strikes in “the heart of Tehran,” and followed up the threat by destroying a radar complex near the Iranian capital. President Trump responded by telling both sides to honor the agreement, and following that message, it appears both countries have refrained from additional strikes. Growing hopes for broader de-escalation in the Middle East drove oil prices lower for a second day, with WTI crude down ~13% (to just above $64 per barrel) from last Friday’s close.