Global central banks begin cutting interest rates

This week, Denmark, Canada and the European Union's central banks made the first interest rate cuts in years. U.S. investors hope that the Fed will follow suit in the months ahead. But hope is not an investment strategy.

Usually, the U.S. central bank is the first out of the gate when it comes to a change in monetary policy. That was not the case this week, as three central banks eased interest rates. The European Central Bank cut by one-quarter of one percent to 3.75%, the first cut since 2019. A similar action was announced on Wednesday by Canada's central bank. The Danish central bank also cut by the same amount. None of these banks indicated that this was a beginning of a trend, but rather indicated a wait-and-see attitude in the future.

These central bank moves were expected by the markets and had little impact on financial markets here at home. American traders were far more focused all week on the results of a macroeconomic data dump that occurred daily.

Friday's non-farm payroll data for May was the most important data point this week. Economists were expecting 185,000 job gains. The labor market added 272,000 jobs, which was a big beat that few were expecting. A strong labor market means less likelihood the Fed will cut rates anytime soon. From that perspective, the numbers were doubly disappointing given some of the data earlier in the week.

Initial unemployment claims, for example, unexpectedly jumped to its second-highest level this year during the last week in May. Two additional employment data points for last month, the ADP employment report, and the JOLTS (Job Openings and Labor Turnover Survey) report also surprised on the downside.

That was good news since the financial markets have been waiting for the Fed's higher for longer interest rate policy to perform as promised. It appeared to be finally happening, at least on the jobs front. Bond yields and the dollar fell on the news.

Conflicting data on the economy also had some traders confused about which direction the market should be going. On Monday, the May ISM Manufacturing Purchasing Manufacturers Index (PMI) was weaker than expected. It is a measure of the health of the manufacturing sector and indicates the prices companies were paying for inputs.  Manufacturing in this country is in a deep downturn that looks to be getting worse.

And yet, on Wednesday, the ISM Services PMI came in better than expected. Given that the services side of the economy is above 60% of GDP, while manufacturing is about 10%, that upside beat quelled recession fears.  Friday's non-farm payroll numbers certainly dispelled any notions that job gains were weakening.

Next week, we will be treated to another FED confab as the FOMC meets on June 11-12. The drama will be even higher than usual because the Consumer Price Index for May will also be released on June 12th. Expectations are that the Fed will announce no change in their policies, despite the interest rate cuts by some other central banks. The betting right now is that if the Fed cuts, it won't be until September.

 Some economists think the Fed should ease now rather than later. They worry that the Fed's view is backward-driven as far as the macroeconomic data is concerned and will wait too long to cut interest rates. That, they fear, will precipitate a hard landing in the economy. I understand their apprehension since it is true that past actions by the Fed indicate they usually wait too long before making policy changes.

Overall, however, despite the data-driven ups and downs of the market this week, the S&P 500 Index managed to hit another record high, as did NASDAQ. In any case, markets as I wrote last week, are due for a pullback at some point in June or July. The question is whether they will fall from a higher level. It is just too hard to tell.

Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires.  Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI).  None of his commentary is or should be considered investment advice.  Direct your inquiries to Bill at 1-413-347-2401 or e-mail him at billiams1948@gmail.com. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.