While the absolute level of unemployment remains low, any further ticks higher in the future would likely influence the Fed to cut rates at a quicker pace.
Unemployment is always released on the first Friday of the month. The next unemployment report comes on August 2, with another on September 6 ahead of a “live” September FOMC meeting and interest rate decision.
FOMC Meeting: July 31, September 18
Fed Chair Jerome Powell spoke before congress earlier this week saying that the US “is no longer an overheated economy … We are well aware that we now face two-sided risks.”
The comments further signal to the market that rate cuts are coming in the back half of this year. Currently, the market is pricing in just a 7% chance of a quarter-point cut in July but a 74% chance of one in September. Some had thought a rate cut in September, at the final meeting before November’s election, would be unlikely as the Fed would not want to be seen as influencing the outcome of the election, but Powell has repeatedly put that notion to rest.
Markets are currently assigning a 96% chance of at least one cut by the end of the year, 72% chance of at least two, and a 25% chance of three.
Treasury QRA: August 7
An important data point for predicting market liquidity, the QRA’s primary piece of information is the mix of short-term bills and long-term coupons it will use to fund the deficit over the coming quarter. Bills are positive for market liquidity as they are treated by holders as cash substitutes, while heavy coupon issuance weighs on risk assets as funding must be sourced (for example, by selling stocks) and long-term interest rates rise.
The change in total market liquidity can be measured by the change in the Fed’s balance sheet, minus the change in the Treasury General Account (TGA), minus the change in the reverse repo facility (RRP).
Over the past year, the Fed’s balance sheet has shrunk by $1.1 trillion (negative for liquidity) and the TGA has increased by $300 billion (negative), perfectly offset by the RRP declining by $1.4 trillion (positive). Basically, the Fed’s balance sheet run-off and the deficit over the past year has been financed entirely by a slush fund built up in the wake of the pandemic:
