S&P 500: Rate cuts and employment

Ten-year Treasury yields rallied for the last two weeks but remain in a down-trend. Respect of resistance at 2.60% would warn of another decline.

10-year Treasury yields

Inflation is subdued and it would be difficult for the Fed to motivate a rate cut when inflation is close to its 2.0% target. The consumer price index (CPI) came in at 1.86% for the 12 months to March 2019, while the more stable Core CPI (ex- Food & Energy) remains close to target at 2.04%.

CPI and Core CPI

After price stability, the second part of the Fed’s dual mandate is to maintain maximum sustainable employment. A review of the last three cycles shows the Fed raising the funds rate (FFR) to curb inflation and then being forced to cut (red highlights) when growth in employment slows.

Payroll Changes and Fed Funds Rate

Total non-farm payrolls are currently growing at close to 2.0%. The Fed would normally need payroll growth to slow by at least 1.0% to motivate a rate cut. The exception is if inflation falls below target, then the Fed may act sooner.

The S&P 500 is headed for another test of its high at 2950, while Trend Index (13-week) recovered to signal moderate buying pressure.

S&P 500

The Nasdaq 100 is similarly testing its earlier high at 7700.

Nasdaq 100

Momentum is slowing and we can expect stubborn resistance at the former highs.