Standard Chartered (OTC:) strategists believe the potential July interest rate cut is “more likely than priced,” saying that current futures market predictions are underestimating the likelihood of such a move.
Specifically, strategists said that futures markets’ forecast of only a 3 basis points reduction at the upcoming July meeting is “too low.” In fact, the bank contends that a cut is not only likely but also their baseline expectation.
“There are two more PCE releases before the July meeting, so there is considerable room for core PCE to slow,” Standard Chartered’s team wrote in a note.
“Also, 2024 February, March and April m/m core PCE deflator growth were below the corresponding months in 2023; January was almost the same,” they added.
The consistent month-over-month inflation being lower than the previous year supports the notion that the PCE trend may be influenced by residual seasonality, which tends to elevate month-over-month changes earlier in the year, strategists explained.
They also point to a modest downtrend that keeps the 2024 monthly changes below those of 2023, thereby sustaining the overall decline in PCE inflation. Furthermore, signs of economic softening are evident, with real PCE increasing at an annualized rate of only 1.1% this year, coupled with indications of stress in consumer finances.
“In addition, we estimate that 46% of the 269k average NFP gain in Q1 was due to undocumented immigrants getting employment authorization,” the team noted. “So NFP growth is on the tepid side net of the contribution of undocumented immigrants.”
