• The Federal Reserve may cut interest rates in July to prevent a recession.

• Weakening labor and housing market data top the list of concerns about tight financial conditions.

• Markets estimate just a 10% chance of an interest rate cut in July, according to the CME FedWatch Tool.

Markets may think it’s a distant possibility, but the Federal Reserve could make its first interest rate cut in July as recessionary cracks begin to form in the economy.

Steven Blitz, an economist at GlobalData TS Lombard, said in a note on Thursday that there is a 60% chance that Fed Chairman Jerome Powell will surprise markets and cut interest rates next month.

According to the CME FedWatch Tool, markets are only on a 10% chance of an interest rate cut at the July policy meeting, with most market participants expecting the first interest rate cut to happen in September or November.

But Blitz wrote that a July rate cut by the Fed would be to prevent an imminent recession, as recent data have shown signs of weakness in the economy.

And with Powell reiterating his stance that the Fed will be data-driven in its interest rate decisions, an imminent rate cut would not be out of the question.

“The latest roundup of broad data suggests that if June payrolls look more like April than May, and June data generally follows suit, the FOMC will let the doves fly in their July communication ,” Blitz said.

The US economy added 175,000 jobs in April, which was well below analysts’ expectations. That weakness was followed by a stronger-than-expected jobs report in May, but the latest jobless claims data has cast a shadow over the labor market.

Additionally, recent housing data has shown a marked slowdown in construction activity.

“May’s slowdown in housing starts, especially for single-family, is not a one-off. There is rising inventory and a perceived decline in traffic that is recessionary at its level,” Blitz said.

Weak sentiment among homebuilders is also dampening expectations for a near-term recovery in homebuilding activity.

An increase in the supply of homes for sale, combined with bearish sentiment, “is an indication that new home construction will be weaker in H2,” Blitz said.

That should be worrying for the Fed, which risks keeping financial conditions too tight for too long and ultimately triggering a recession.

That risk seems increasingly apparent after several hawkish Fed presidents like Neel Kashari recently commented that the Fed may not cut interest rates until December.

“There is nothing more ridiculous than the current stream of FOMC speakers declaring when the Fed will start tapering. The data will tell them when the Fed will cut, not the other way around, and they have no better idea data than the rest of us,” Blitz said.

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And with recent data showing cracks in the housing and labor markets, that means a rate cut could happen sooner than expected.

“I think 60/40 in favor of an ‘ease’ in July. Recession is not an option,” Blitz said.

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