Fed Speak Continues to Preach Patience

Fed Speak Continues to Preach Patience

• Treasury yields are a bit higher this morning as investors weigh the latest Fed speak that continues to preach patience, and the stronger-than-expected retails sales numbers do give the Fed some backing for their stance in waiting on more positive inflation data for a possible September rate cut. Currently, the 10yr note is yielding 4.18%, up 2bp on the day, and the 2yr is yielding 4.45%, unchanged on the day.

• In a Wall Street Journal interview New York Fed President John Williams offered words of encouragement over the last few inflation reports, but was quick to add, “I would like to see more data to gain further confidence inflation is moving towards our 2% goal.” He added that if July and August data are similar to the last three months that would provide the additional confidence. Thus, September seems to be where the Fed is eying as a possible first rate cut. That’s no real surprise, but it does remove any lingering hopes for a July cut.

• The highlight today will be Fed Governor Christopher Waller’s views on the economy at 9:35 am ET. Waller is one of the “thought-leaders” on the FOMC, but we suspect he’ll be echoing the views of Williams and Powell, encouraged by the recent string of inflation readings but wanting to see a couple more before committing to a cut.

• One reason the Fed will continue to preach patience is the latest read on retail sales that showed the consumer hanging tough in the consumption game. All the different sub-readings beat expectations, but sales ex-autos and gas increased 0.8% which was four times the 0.2% expectation and the highest MoM gain since January 2023. The GDP-included Control Group increased 0.9% easily beating the 0.2% expectation and resulted in the Atlanta Fed’s GDPNow forecast of second quarter GDP being bumped from 2.0% to 2.5%. That solid growth expectation gives the Fed breathing room that the economy isn’t about to fall apart.

• What’s even more compelling about the retail sales is that it is a more goods-side focused report vs. services which is where the consumer has been focused on for the last year. We did see some softening in the core services inflation numbers in May and June (see graph below) so maybe this speaks to a consumer moving back again towards the goods-side which had been where the bulk of inflation improvement has occurred. Anyway, we’ll get the more comprehensive PCE spending numbers on July 26^th, so we’ll reserve judgment on any shift in consumer spending habits until then.

• Finally, June housing starts and permits beat expectations with a slight upward adjustment to both for May which points to a possible bottom in recent activity and with lower mortgage rates on the horizon July activity should be positive as well. In a nod to lower mortgage rates, weekly mortgage applications rose 3.9% which is the highest since early June as refi applications increased 15.2% as the 30yr mortgage rate dipped back under 7% at 6.87%.

Core Services Ex-Housing: Negative for Second Straight Month

Source: Bloomberg