Fed Officials May Sound More Dovish if PMI data show growth slowed in April
Fed Officials May Sound More Dovish if PMI data show growth slowed in April
By:Ilya Spivak
But how can they justify a rate cut without losing face as Trump attacks Powell?
- Wall Street is back under pressure as President Trump demands the Fed cut interest rates.
- The bond market is reflecting fear of uncertainty and the threat of inflation.
- Will soggy U.S. PMI figures enable the Fed to credibly dial up dovish signaling?
Stock markets were back on the defensive last week after a sharp rebound from 15-month lows sputtered without follow-through. The bellwether S&P 500 stock index fell 1.5%. The tech-tilted Nasdaq 100 shed 2.3%. Gold prices continued to climb, and the U.S. dollar continued to lose ground against its major counterparts.
A modicum of calm arrived in the bond market, with Treasury yields pulling back a bit after the previous week’s explosive surge. Bonds crashed and the rate on the 10-year note jumped 12.4% as rapidly rising term premium pointed to concern about uncertainty in U.S. fiscal policy.
Stocks swoon as uncertainty risk builds in the bond market
After that bloodletting, an 11th-hour reprieve from President Donald Trump on some of the reciprocal tariffs announced on “Liberation Day” helped anchor Treasuries. The White House said it would pause raising duties above the new baseline of 10% for 90 days to allow a brief window for negotiations. China was pointedly excluded.
Another bearish flareup is already underway at the start of this week, however. This time, Mr. Trump’s mounting attack on Federal Reserve Chairman Jerome Powell seems to have the markets up in arms. The President is fuming about delayed interest rate cuts, venting on his Truth Social platform that Powell’s "termination cannot come fast enough."
As bonds lurch lower anew, the cost of compensation for duration risk embedded within 10-year Treasury yields has jumped to the highest share of overall borrowing costs since May 2021. Meanwhile, the breakeven inflation rate is falling. This implies the markets anticipate a sharp economic downturn is ahead.
Will the Fed find solid evidence to justify a dovish pivot?
It may also suggest the Fed has clearance to speed up the arrival of interest rate cuts, if only it can point to solid evidence to justify the move. Ironically, President Trump may be doing more to delay stimulus with his goading. The central bank is rightly loath to appear to be kowtowing to the White House, even if in truth it isn’t.
With that in mind, traders will keep a close eye on incoming purchasing managers index (PMI) data from S&P Global. It is expected to show that U.S. economic activity growth slowed sharply in April. While is not the “hard” data that Chair Powell has wished for out loud, it may embolden Fed officials to dial up dovish rhetoric.
As it stands, the markets are pricing in 117 basis points (bps) in cuts though year-end 2026. That amounts to four standard-sized 25bps moves and 68% probability of a fifth one, with the first reduction on the menu for July. Global markets may find some much-needed relief if that tally grows, and the timeline shifts to greater urgency.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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