More Weak Reports Yet the Fed Stays Hawkish

  • Treasuries are heading into the weekend with slightly lower yields as European PMI’s were mostly lower than expected. Yields are near the low end of the range that has developed post-CPI and PPI. US data is due later this morning, but S&P Global preliminary June PMIs and May Existing Home Sales aren’t likely to shift the tone to any great degree (see more below).   Currently, the 10yr note is yielding 4.22%, down 3bp in yield, and the 2yr is yielding 4.70%, down 3bp in yield.


  • The May Retail Sales report disappointed and was the second weak report in a row which could signal the consumer is finally starting to step back from their previous pace of consumption. And with our economy based two-thirds on consumption it could have huge implications on growth in the second half of 2024 and into 2025. Most of the sales metrics missed expectations with overall sales up just 0.1% vs. 0.3% expected. In addition, the already weak April report was revised even lower from 0.0% to –0.2% in overall sales with other metrics similarly revised lower. The only metric in May that matched expectations was the Control Group at 0.4% vs. -0.5% in April (compared to an initial estimate of -0.3%).


  • Admittedly, the Retail Sales report is more goods-based and that is not where the consumer has been lately. The Personal Income and Spending report is more comprehensive and includes much more service-based spending which has been where the consumer has been focused of late. Even with that said, the April personal spending numbers weren’t that strong even with the boost from the services-side. Next Friday’s Personal Income and Spending report will have Fed watchers focused on the PCE inflation series but expect those spending numbers to attract some attention as well.


  • Housing starts and permits for May also disappointed this week. Starts fell to 1.277 million vs. 1.370 million expected and that’s the lowest level of starts since June 2020. It should be noted that multi-family contributed most to the downside miss (-10.3%MoM and -51.7% YoY) but single-family was on the weak side as well (-5.2%MoM and -1.7%YoY). Building permits also disappointed at 1.386 million vs. 1.450 million expected. It’s also the lowest total since June 2020. So, if you were expecting some relief on the constrained housing inventory it doesn’t seem as though it will come from the new build market. Also, it looks like the deluge of multi-family projects is slowing markedly and that has implications both on the construction employment side as well as housing inventory.


  • Despite the gathering weakness being reflected in the latest economic releases (save for the noisy jobs report), Fed speak has been mostly what we’ve grown accustomed to hearing: “need more data, need more time.” More than a dozen Fed officials offered their post-FOMC thoughts on the economy this week and virtually all of them continued with the possible rate cut at year-end refrain. We think we’ll hear that messaging until we don’t. That is, don’t expect a gradual softening. Rather, it could be “we need more data” then “we now have the data we need to cut.” Given the dip in retail sales, and other signs of a consumer less willing to accept further price hikes, we think a September cut remains in play. Also, the annual Jackson Hole symposium of central bankers seems a possible high visibility event for that shift in language, teeing up a September cut. We’ll have to see how the data evolves this summer but that is one possible scenario.


  • Adding a little more heat to the Fed is the growing number of central banks moving into the rate-cutting camp. Yesterday, the Swiss central bank unexpectedly cut 25bp for the second time this year. Other developed market central banks that have started cuts are the ECB, Bank of Canada, and Sweden. Bank of England, as expected, didn’t cut yesterday but the language softened such that traders are looking at the August 1 meeting as a possible first rate cut in the cycle. This is not to say the Fed will feel pressure to cut just because other central banks are, but if the data allows it will certainly bolster the case for a cut.


  • Finally, today’s data includes preliminary June PMIs from S&P Global. Expectations are for both the manufacturing and services sector to tick lower from May levels, but both are expected to remain over 50 indicating expansion (manuf. 51.3 expected; services 54.0 expected). Existing Home Sales for May are due later this morning with a dip to 4.09 million annualized expected vs. 4.14 million in April. Given the weakness in the housing starts and permits a miss to the low side wouldn’t be surprising.

Housing Starts Dip to Lowest Since June 2020


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Published: 06/21/24 Author: Thomas R. Fitzgerald