Markets waffle again as investors worry about interest rate cuts

Dow dropped 200, decliners over advancers 5-4 & NAZ was up 34.  The MLP index fell 2+ to the 274s & the REIT index was steady in the 373s.  Junk bond funds rose & Treasuries were heavily purchased lowering yields significantly (more below).  Oil fell a big 2+ to the high 78s & gold rose 17 to 2364.

Dow Jones Industrials 

Inflation in the US is unlikely to fall to the Federal Reserve's 2% target for at least 3 more years, according to a new report published by the Cleveland Federal Reserve Bank.  The findings suggest the pandemic-era shocks that stoked high inflation, including supply chain disruptions & rabid consumer demand, have been resolved, but that there are other "very persistent" forces fueling price pressures within the economy.  "There are both theoretical and empirical reasons to think that, absent X factors such as continued favorable supply shocks or strong productivity gains, the last half-mile could well take several years," Cleveland Fed economist Randal Verbrugge wrote in the report.  That suggests inflation will not return to pre-pandemic levels until mid-2027 at the earliest.  Verbrugge differentiates between the 2 sources of inflation: extrinsic, meaning external shocks like production costs or the overheated labor market, & intrinsic, meaning internal shocks like wage-setting & price-setting decisions & the way that inflation expectations are formed.  The resolution of supply chain issues contributed to the notable decline in inflation last year.  But that progress appears to have run its course, & inflation's path seems like it will be "governed by its intrinsic dynamics" moving forward.  Those forces include wage growth & corps raising or lowering their prices.  "Hence, according to this analysis, inflation could take several years to return to its target," Verbrugge wrote.  High inflation has created severe financial pressures for most US households, which are forced to pay more for everyday necessities like food & rent.  Grocery prices are up more than 21% from the start of 2021, while shelter costs are up 18% & energy prices, meanwhile, are up 38.%.  Several Fed officials have suggested in recent weeks that borrowing costs should stay higher for longer as inflation remains abnormally high.  "I don’t expect to get that greater confidence that we need to see on the inflation progress towards a 2% goal in the very near term," New York Fed Pres John Williams said earlier in May.

Inflation will take years to fall to 2% target, according to Cleveland Fed model

The influential Organization of the Petroleum Exporting Countries & its allies, OPEC+, agreed to extend their official crude output cuts into 2025, also stretching 2 other sets of supply curbs over different periods.  The decision came in line with the forecasts of analysts & OPEC+ delegates who said prior to the meeting that the alliance would likely extend its existing cuts.  The coalition will produce a combined 39.7M barrels per day next year.  The figure marks the production levels required of individual members before applying any additional production adjustments & factors in the group departure of long-standing OPEC member Angola earlier this Jan.  OPEC+, including kingpins Saudi Arabia & Russia, said they would extend a set of nearly 1.7M barrels per day of voluntary cuts that were set to expire at the end of this year.  These reductions will now be implemented throughout 2025.  This smaller group of OPEC+ member will also stretch another round of voluntary output cuts totaling 2.2M barrels per day until the end of the 3rd qtr of this year.  These trims were initially only scheduled to last until the end of the 2nd qtr.  “The quantities of this reduction, amounting to 2.2 million barrels per day, will then be restored gradually, on a monthly basis, until the end of September 2025,” the statement said.  Saudi Arabia's Abdulaziz bin Salman, who chairs the OPEC+ coalition, said  that there is no “rocket science” to forecasts & acknowledged that, where the OPEC report may be making a “higher assessment” on the call for crude, there are likewise “those who are also taking a very pessimistic view on demand.”  He flagged that the OPEC+ group is approaching supply-demand considerations with prudence & precaution, saying of the prospect of impending market tightness, “I will believe it when I see it.”  OPEC+ ministers will next meet to discuss policy steps on Dec 1.

Oil alliance OPEC+ extends collective crude production cuts into 2025

Treasury yields fell as investors assessed weak US manufacturing data and looked toward a key jobs report slated for the end of the week.  The yield on the 10-year Treasury was down more than 8 basis points at 4.43% & the 2-year Treasury yield was last more than 6 basis points lower at 4.83%.  Yields & prices move in opposite directions & 1 basis point equals 0.01%.  Signs of contraction in the US manufacturing sector weighed on yields.  The ISM manufacturing index measured 48.7 in May, below an estimate that called for 49.6.  A reading below 50 is an indication of a contraction.  Investors are awaiting further economic data this week that could provide fresh hints about the state of the economy & the path of monetary policy.  This includes JOLTS job openings figures for Apr, as well as the May jobs report, which includes nonfarm payrolls & the unemployment rate for the month.  Elsewhere, the European Central Bank is set to meet Thurs & is widely expected to announce its first interest rate cut since 2019.  That comes ahead of the next Federal Reserve meeting on Jun 11-12.  Traders are not pricing in a rate cut from the Fed until Sep, according to CME Group's FedWatch Tool, but will be watching the meeting closely for hints about the monetary policy outlook.  Investors today also continued to digest Fri's release of the personal consumption expenditures (PCE) price index for Apr.  The core PCE, which strips out food & energy costs, rose 0.2% on a monthly basis & 2.8% from a year earlier.  The monthly figure was in line with expectations, while the annual reading came in 0.1 percentage points above the forecast.  Including food & energy costs, the PCE increased 0.3% from the previous month & 2.7% on an annual basis, as expected.

Treasury yields slip as U.S. manufacturing sector shows signs of contraction

Continued high interest rates that are likely to persist, making investors nervous.  Additionally there are no indications about quick fixes.  One tiny plus on inflation is that oil prices (WTI), an important part of the inflation story, have flattish under $80 since 2022.