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The Weekly Bottom Line

Our summary of recent economic events and what to expect in the weeks ahead.

Date Published: July 19, 2024 

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Highlights

  • After an eerily calm few months, a fresh dose of volatility descended across global financial markets this week. 
  • Top Fed officials speaking this week noted that they are getting ‘closer’ to cutting interest rates. Financial markets have fully priced the first cut to come in September. 
  • Retail sales and industrial production data for June came in better than expected, while homebuilding remains under pressure.

Nearing the Pivot Point 


Chart 1 shows the z-scores for several labor market indicators including the ratio of job openings to unemployed, unemployment rate (inverted), quit rate, and the NFIB's % of firms with positions not able to fill. All metrics have normalized back to pre-pandemic levels – suggesting imbalances in the labor market have normalized. Data is sourced from the Bureau of Labor Statistics and NFIB.

After an eerily calm few months, this week brought a fresh dose of volatility across global financial markets.  The equity selloff was heavily concentrated across the tech sector, following some speculation that the Biden administration is considering implementing new rules to clamp down on companies exporting chipmaking equipment to China. While the selloff widened as the week progressed, small-cap stocks still managed to end the week 2% higher and are up 8% over the past nine trading days. The S&P 500 is down nearly 0.5% over that same period. The recent outperformance has largely been driven by market participants becoming increasingly confident that the Fed will begin easing its policy stance over the coming months. At the time of writing, market odds are fully priced for the first cut to come in September, with 63 bps of easing expected by year-end. 

Based on how recent data has trended, investors have good reason to suspect that the Fed will likely begin dialing back its policy rate come September. Last week’s CPI report showed inflationary pressures cooling faster than expected, while recent readings of the labor market suggest that nearly all the pandemic imbalances have been restored (Chart 1). Speaking at an event at the Washington Economic Club this week, Powell reiterated the point on the labor market, citing “… essentially we’re back at equilibrium”. On inflation, Powell noted that recent readings have “added somewhat to confidence”. Other Fed officials including Williams and Waller echoed Powell’s sentiment this week, noting that the improved inflation trajectory has brought the Fed “closer” to cutting interest rates and that the current economic data are consistent with the Fed achieving a ‘soft landing’. 

Chart 2 shows housing starts data, dating back to 2014. Since the Fed has started raising interest rates in Q1-2022, housing starts have fallen by 21% and have shown no sign of recovery. Data is sourced from the Census Bureau.

Indeed, economic data out this week support the notion that while the economy is slowing, it’s not falling off a cliff. Retail sales were flat in June, but that was largely related to a sharp pullback in auto sales due to a cyber attack on a software firm that supports car dealers across the country. Meanwhile, the control retail group – used in the BEA’s calculation of PCE – rose by a healthy 0.9% m/m, while revisions to prior months showed a stronger pace of consumer spending in April/May. Consumer spending is tracking around 2% annualized for Q2, a touch higher than Q1’s 1.5% but handily below the +3% pace averaged through the second half of last year. 

Meanwhile, industrial production data for June rose by a respectable 0.6% m/m and recorded its largest quarterly gain since Q2-2021. Encouragingly, the manufacturing index has now posted gains in four of the last five months and is closing in on levels not seen since the Federal Reserve first started hiking interest rates back in March 2022. Conversely, home building activity continues to feel the pinch of higher rates, with Q2 housing starts slipping to a new post-Fed tightening low (Chart 2).  
All told, it’s becoming increasingly clear the U.S. economy is downshifting from last year’s breakneck rate of expansion to something closer to a trend-like pace. Provided the next two inflation readings don’t show any meaningful reversal in recent trends, the Fed likely has a clear path to start cutting rates in the coming months

Thomas Feltmate, Director & Senior Economist | 416-944-5730

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