Friday's market action in response to the strong non-farm payroll report seemed to take a Fed cut off the table in 2007. But not so fast. Don't forget the following:
- Job growth is a lagging indicator. Firms don't tend to lay people off until demand has slacked for their products. So the slack demand tends to come first, job losses second.
- The particular pressure on the financial system today relates to mortgage lending. A small number of Fed cuts may be especially potent in response to that specific problem.
So I still think there will be 1-2 cuts this year. At least some people in the market agree with me, as we've had small rallies the last two days and steepened by 1bp. We'll know more at 10AM when the minutes are released.
My prediction would be a bull steepener. Friday's action clearly tells you the street is lined up for a hawkish tone to the minutes. Remember, they were set up for a hawkish initial statement from the Fed and didn't get it. My bet is on the same today.
I will say for those who want a cut in June, its too late for that now.