Will the Fed Pivot? | Morning Express 07/25/2022

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- The Federal Reserve begins their two-day policy meeting tomorrow and will conclude with a statement at 1:00 pm CT.

- According to Fed Funds futures via the CME FedWatch Tool, there is a 76.3% probability they hike 75-basis points. There is also 49.7% probability they hike by at least 150 basis points between this meeting and September, to 3.0%.

- On Friday, SPGI Manufacturing PMI for July topped expectations (52.3 v 52.0 exp) but came in at the lowest since August 2020. Whereas Services PMI showed a surprise deterioration (47.0 v 52.6) and was the lowest since June 2020.

- From SPGI Chief Economist: “The preliminary PMI data for July point to a worrying deterioration in the economy. Manufacturing has stalled and the service sector’s rebound from the pandemic has gone into reverse, as the tailwind of pent-up demand has been overcome by the rising cost of living, higher interest rates and growing gloom about the economic outlook.”

- Q2 GDP is due Thursday. Although it is a backward-looking indicator, at times, it can show trend. The Atlanta Fed GDPNow model expects Q2 GDP at -1.6%. However, analysts estimate Q2 GDP at +0.4%. With final Q1 GDP at -1.6%, another contraction will define a recession.

- The FedWatch Tool signals a 40.8% probability the Fed raises rates to 3.25% and 30.8% probability to 3.50%.

- By June 2023, the highest probability across a wide distribution shows 30.5% odds rates will be back 3.0%. Cuts are becoming priced in.

- At a minimum, there is a clear expectation for the pace of hikes to slow down after September.

- The Bloomberg Commodity Index finished last week 15.7% from its June peak. Gasoline futures have fallen 25% and more than $1 from their June peak while retail gas is now widely seen at and below $4.00.

- Expectations for inflation, according to the Cleveland Nowcast model, show it holding steady in July at 8.9% headlines and 6.05% Core, versus 9.1% and 5.9% in June. However, the MoM rise in July is expected to come in sharpy at 0.33% headline and 0.48% Core, versus 1.3% and 0.7% in June.

- There are signs some job market frothiness is being relieved, something that is further supported by the surprisingly sharp deterioration in July Services PMI. Also, did last week’s Philly Fed Manufacturing signal a reversion in producer prices? It dropped from 65.5 in June to 52.2 in July.

- The Fed is not going to begin any sort of victory lap in their fight against inflation this week, especially given it is too early and evidence is still developing, but market participants will be looking for any signal of a slowdown in the aggressive nature of the bank’s tightening.

- Coca-Cola, McDonald’s, UPS, Raytheon, Unilever, GE, and many more report ahead of the bell tomorrow. Microsoft, Alphabet, and Visa all report after Tuesday’s bell.