'50-50' for a June interest rate cut: Macro strategist

In a speech on Thursday, Minneapolis Federal Reserve Bank President Neel Kashkari claimed that if inflation continues to stall out, then he could foresee no interest rate cuts from the Fed this year. US Equities (^GSPC, ^DJI, ^IXIC) began to trade lower on Thursday afternoon.

BNY Mellon FX & Global Macro Strategist John Velis joins Market Domination Overtime to discuss his thoughts on Kashkari's comments and the market's reaction to them.

In terms of the current market conditions and potential for a rate cut, Velis states: "I think we need to see housing and non-housing core services come down. I think inflation is still the name of the game. I do think there is some signs of market slowing so I'm not sure that Kashkari is necessarily the catalyst for what's been going on today, and I still think we're 50-50 for a June cut. I'm leaning for a June cut because I do think the inflation data will give them enough readings to be comfortable doing so."

For more expert insight and the latest market action, click here to watch this full episode of Market Domination Overtime.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

JOSH LIPTON: John, it is good to see you. So let's just dig in right there, you know, on the Fed, John. Central bankers, policymakers continue to speak. Neel Kashkari's comments certainly made some headlines, John, saying, listen, maybe no cuts this year if we don't see progress in inflation. What did you make of that?

JOHN VELIS: I think they're being a little overrated in what happened in the overall afternoon action. I mean, Kashkari has been very much to the hawkish side of the spectrum. And he's really kind of stating the obvious. If inflation doesn't come down, we're not going to get cuts. And that's the name of the game. And I think Mester put it right and Goolsbee, we need to see housing and non-core-- non-housing core services come down.

So I think inflation is still the name of the game. I do think there are some signs the job market is slowing. So I'm not sure Kashkari is necessarily the catalyst for what's been going on today. And I still think we're 50/50 for a June cut. I'm leaning for a June cut, because I do think the inflation data will give them enough readings to be comfortable doing so.

JULIE HYMAN: So if not then Kashkari necessarily, do you ascribe it to geopol? As we were just talking about, geopolitics headlines today. Do you think there's some underlying other things going on in the market here?

JOHN VELIS: Yeah. I was listening to your discussion on the lead in. And I thought it was very good, you kind of encapsulated it very well. Bonds were sort of oversold. There are some geopolitical tensions that have come, you know, kind of gradually throughout the day. And, you know, some of those high Mag Seven names were overbought and time for them to people to sell some stocks and buy some bonds. Saw the dollar rally a little bit, I think there's geopolitical risk in there. Kashkari didn't help, but I don't think he's the main catalyst for the afternoon's action.

JOSH LIPTON: John, going back to something you said, you're looking for a June cut. And you see inflation continuing to moderate back down to that target. How come, John? Because we've had other guests on the show who said they're actually maybe a bit more concerned about inflation than it looks like, kind of like a bit sticky to them here.

JOHN VELIS: I understand That and I think we're still kind of scarred by the January-- the January data that was printed in February and some of the February data that came out. I'm really keen on core PCE and within that, the core PCE X services number.

Housing is gradually declining in line with rents on the Street. So that's giving-- it's going in the right direction. Goods are essentially at zero annual inflation. And it's that sticky, somewhat sticky one that's finally peeked its head below 4%. And the monthly increase in February was only half that of the January increase. So I'm expecting that if we get more readings like that, that they'll be covered and cut, because we do think the labor market is going to show some signs of weakness, maybe not in tomorrow's headline number, but we're looking at a broad number of things.

JULIE HYMAN: Well, John, I was going to ask you what you're looking for in tomorrow's number, what you're expecting, and which sort of part of the report you're going to be paying the most attention to.

JOHN VELIS: Two things. Obviously, the unemployment rate will grab a lot of attention as will the headline NSPs. But I really want to see where the job growth was. We've seen it primarily in two sectors. And that's government and medical care services employees. And those are not cyclical sectors, those are ones that tend to increase almost secularly.

So if you take those guys away, we have much fewer nonfarm payrolls being generated X those sectors. Now I know we can play the X game forever. But my point is the other thing I'm going to look at is household unemployment. That's increased so many-- quite a few of the last several months. And I'm careful to see if new people who are coming into the labor market are indeed not finding jobs. So those are the two things I'll look at under the surface tomorrow.

JOSH LIPTON: And John, you do have FX responsibilities there at BNY, so I'm just curious, John, to get your broad view on the dollar here.

JOHN VELIS: Well, aside from today, if today's geopolitical concerns don't bubble over and become a longer run thing, I think the dollar will weaken. It weakened actually this morning a bit when the initial jobless claims were a little higher. It weakened on masters comments as well. I think if we do get the June cut as the market gets closer and closer to do that, and it's going to take the data, I concede, but I think the data are going to go in the right direction, then I think the dollar will start to decline a little bit, not massively, but sort of reflect that finally priced in cut that's getting closer and closer.

After that, I think broad long-term, second half of the year, let's say, I think the dollar will return to a seat of prominence. US will continue to outgrow its peers. The Fed won't be cutting rates as much nearly as the other central banks will. And I think US growth will outperform China and eurozone. So it's sort of a Lil J, nothing really major in the downtrend, but probably a stronger dollar once the cuts start to happen and other central banks join the game.