May Economic Data in the US Appears Mixed Under High Interest Rates

Last Friday, S&P Global released the June US Composite PMI report, which slightly rose to 54.6, reaching its highest level since April 2022. This indicates that the US economy is wrapping up the second quarter on a solid footing. However, the so-called "scary data" of US May retail sales stagnated, reflecting a slowdown in consumer spending. Additionally, last week’s worse-than-expected initial jobless claims data also suggests that the labor market is cooling down.

In terms of inflation, economists expect the May PCE index to fall from a month-on-month increase of 0.3% to 0%, with the core index excluding food and energy rising slightly by 0.1%. Moreover, economists predict that both the overall and core PCE price indices for May will increase by 2.6% year-on-year, close to the Federal Reserve's 2% target.

This is undoubtedly good news for the Federal Reserve. Fed officials have previously stated that despite encouraging declines in other inflation data, including the Consumer Price Index, they need to see several more months of inflation progress before deciding to lower interest rates.

Regarding Treasury yields, the US 10-year Treasury, often referred to as the "anchor of global asset pricing," is currently in a wide range of 4.70%-3.80%, with potential for upward or downward breakthroughs. Analysts suggest that if consumer resilience, a strong job market, and a robust stock market persist, and the Fed delays rate cuts, yields could rise; otherwise, they may fall.

According to CME's "FedWatch": The probability of the Fed maintaining rates unchanged in August is 89.7%, with a 10.3% probability of a 25 basis point cut. By September, the probability of rates remaining unchanged is 35%, with a cumulative probability of a 25 basis point cut at 58.7%, and a 50 basis point cut at 6.3%.

Currently, market bets on Fed rate cuts have been postponed to September. Huatai Securities noted that since late May, market expectations for US growth and inflation have ceased to rise, and these trends have continued and deepened in June. Compared to a year ago or even three months ago, economic data has become less of a constraint on Fed rate cuts, while the necessity has marginally increased.

However, the institution also stated: "If short-term inflation does not rebound, labor data remains the only uncertainty," implying that labor data could still be a major obstacle to Fed rate cuts. Huatai believes that non-farm employment data is likely to accelerate its decline within three months. If the data falls short of expectations, the Fed may still start a rate-cutting cycle this year. However, in the medium to long term, the necessity and possibility of continuous rate cuts in the US are low, and the endpoint of rate cuts may be higher than the Fed's current guidance (2.8%).

This week, the remarks of two key Fed officials—Fed Governor Waller and Chicago Fed President Goolsbee—deserve attention, as both are seen as Fed bellwethers. From a factional perspective, one is a hawk and the other a dove. Market analysts suggest that since last week's Fed speeches mainly focused on inflation, this week's speeches may touch on other topics. If they mention specific rate cut numbers, it could significantly impact the market.

Notably, the timing of their speeches is also "just right": one is an hour before the US stock market opens, and the other is an hour after the market opens, both being periods of active global trading.