Rate update: Fed meeting may break rate momentum

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By G. Steven Bray

Last Fri’s weak jobs report sent rates tumbling to their lowest levels of the year. It wasn’t just that the May number missed expectations by about a third, but the reports for the prior two months were revised lower by 66k jobs. First quarter job growth averaged a meager 121k per month.

Investors are weighing whether this is just another economic soft patch or if the economy has turned. While other economic data has been mixed for many months, respectable job growth has buoyed consumer and business sentiment. The concern is that weaker job growth could cause consumers to pull back making economic weakness a self-fulfilling prophecy.

With this as a backdrop, let’s look at the other factors affecting rates in the next couple weeks. This Thurs is a trifecta of potentially rate-moving events. First, we have the British elections. A surprise result could be unsettling for markets, but I think the chances of that are small. We also have the European Central Bank meeting. An announcement that the ECB will tighten monetary policy could push rates higher, but that doesn’t seem likely. Finally, we have the Comey testimony before the Senate. The media frenzy surrounding the investigation still has markets on edge. If the testimony is a dud, look for some of the recent momentum towards lower rates to dissipate.

However, probably a more important event is next week’s Fed meeting. It’s rather certain the Fed will raise short term rates once again, but markets are more interested in what the Fed says about recent economic data, especially weak inflation data, and its plans to reduce the size of its bond holdings. If the Fed ignores recent weakness, it could pressure rates higher. Between now and then, I really don’t expect rates to move a lot. Investors are unlikely to take extreme positions until they hear what the Fed says.