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[News] U.S. Retail Sales Beat Expectations in August, but Markets Still Bet on Aggressive Fed Rate Cuts
The U.S. retail sales slightly increased in August, as reported by the U.S. Census Bureau on September 17. The U.S. Retail sales rose by 0.1% month-over-month in August, down from 1% in July, but better than market expectations of -0.2%. On a year-over-year basis, retail sales grew by 2.1%, lower than the previous month’s 2.7%.
The increase this month was primarily driven by online store sales, which saw a monthly growth of 1.4%. However, this was partially offset by a 0.1% decrease in automotive-related sales and a 1.2% decline in gas station sales.
Core retail sales (excluding automotive-related sales) rose by 0.1% on a monthly basis, while double-core retail sales (excluding automotive and gas station sales) increased by 0.2%. The control group retail sales, which exclude automobile sales, building materials, gasoline stations, and food services, rose by 0.3%.
In summary, while August retail sales showed some resilience in U.S. consumer spending, certain declines may have been driven by falling prices. Nevertheless, the market appeared to overlook the retail sales data, as FedWatch indicated that the probability of a 50-basis-point rate cut had risen to 65%, up from 50% the day before.
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[News] US Q2 GDP Growth Revised up to 3% as Initial Jobless Claims Slightly Declined
Summary:
- Q2 real GDP revised up to 3.0%
- Initial jobless claims last week fell by 2,000 to 231,000
- Continuing claims last week rose by 13,000 to 1,868,000
The U.S. initial jobless claims slightly declined last week, as reported by the Bureau of Labor Statistics on August 29. The Initial claims was 231,000, down by 2,000 from the revised figure of the previous week, outperforming market expectations of 232,000. The four-week moving average was 231,500, down by 4,750 from the previous week’s revised figure. Meanwhile, continuing claims increased by 13,000 to 1,868,000.
At the same time, the Bureau of Economic Analysis also released the second estimate for Q2 Real GDP, revising the annual growth rate up to 3.0%, an increase of 0.2% from the preliminary estimate. The core PCE inflation rate was revised down to 2.8%, a decrease of 0.1% from the preliminary estimate. Overall, the U.S. economy continues to demonstrate resilience, with inflation remaining on a downward trend.
During last week’s Jackson Hole Global Central Bank Symposium, the Federal Chairman Jerome Powell reiterated that the risks of rising inflation are continuing to diminish and that there is sufficient reason to believe inflation will return to 2%.
Meanwhile, the downside risks to the labor market are gradually increasing. Although the unemployment rate remains at a historically low level, it has risen back to 2023 levels. This increase is primarily due to higher labor supply and job vacancies rather than widespread layoffs. However, the Fed do not welcome any further cooling of the labor market.
Finally, Powell clearly stated that the time for policy adjustments has arrived. Although he did not reveal specific plans for rate cuts, insights can be gained from the September release of the Summary of Economic Projections (SEP), where adjustments to the dot plot will indicate the pace and magnitude of future rate cuts by the Fed. Currently, the market expects the Fed to cut rates by 3 to 4 quarter-points throughout 2024 (1 quarter-point in September, 1 to 2 quarter-points in November, and 1 quarter-point in December).
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[News] July FOMC Meeting Minutes Highlight Rising Labor Market Risks, Indicating Dovish Policy Outlook
The Federal Reserve released the minutes of the July FOMC meeting on August 21, providing insight into the views of Fed officials on the current economic conditions and outlook:
Inflation: Inflation has eased compared to a year ago, with core PCE rising 2.6% year-over-year in June. Although still above the Fed’s 2% target, recent data have given Fed officials confidence that inflation is on track to reach the target, supported by factors such as slowing economic growth, weakened pricing power among businesses, and reduced household savings. Many officials noted that as the labor market rebalances, wage growth has continued to slow, which should further translate into a decline in core non-housing services inflation. Some officials also noted that the decline in new tenant rents is likely to have a delayed impact on housing services inflation, leading to the continuous moderation of housing services inflation
Employment: The labor market is currently strong but not overheating. While the unemployment rate has been rising slightly since April, it remains at historically low levels. Some officials believe that job growth may be overestimated, as several officials pointed out that various indicators suggest the labor market is continuing to slow, with declines in hiring rates and job openings. Others also indicated that the rebalancing of the labor market has been partly supported by an increase in labor supply, particularly due to rising labor force participation rates among those aged 25 to 54 and an increase in immigration.
Policy Outlook: With inflation continuing to decline, most officials believe that if inflation continues to fall as expected, it would be reasonable to consider easing monetary policy at the next meeting. Many officials see increasing risks to the employment target, warning that if the labor market slows further, it could lead to more significant deterioration. All officials agreed on the necessity of rebalancing and closely monitoring the risks associated with the dual mandate of price stability and maximum employment.
Overall, with inflation steadily decreasing and potential risks of labor market deterioration, the Fed has signaled a leaning toward a rate cut in September. Additionally, the U.S. Bureau of Labor Statistics on August 21 revised down the nonfarm payrolls by 818,000 from April 2023 to March 2024, meaning that the average monthly nonfarm payroll increase for this period will be revised down from 242,000 to 174,000, confirming the possibility that employment growth had been overstated. The market currently expects a total of 100 basis points in rate cuts throughout 2024 (25 basis points in September, 50 basis points in November, and 25 basis points in December).
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(Photo Credit: Federal Reserve)
Insights
[News] The U.S. Unemployment Rate Rises Again to 4.3% in July, Heightening Recession Fears in the Market
The U.S. Bureau of Labor Statistics released the July employment report on August 2, indicating that the unemployment rate increased to 4.3% from 4.1% in June. Although the unemployment rate remains near historical lows and close to the natural rate of unemployment, it has been rising for four consecutive months.
At the same time, nonfarm payrolls increased by only 114,000, significantly below the 12-month average of 215,000. The year-over-year growth in average hourly earnings also declined from 3.8% to 3.6%, continuing its downward trend. Additionally, the number of initial jobless claims continues to rise.
During the July FOMC meeting, the Federal Reserve noted that it would more carefully balance the risks between the labor market and inflation. Fed Chair Jerome Powell also explicitly stated that he did not want to see further cooling in the labor market.
In light of the series of data showing a slowdown in the labor market, the market has started to anticipate more aggressive rate cuts at the September FOMC meeting. According to FedWatch data, the probability of a 50-basis-point rate cut has surged from 11.5% a week ago to 77.5%.
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(Photo Credit: Pixabay)
Insights
[News] Fed’s July FOMC Meeting: Rates Unchanged as Focus Shifts to Balancing Inflation and Employment Risks
The Federal Reserve held its July FOMC meeting on July 31, deciding to keep the federal funds rate target range unchanged at 5.25% to 5.5%. In its post-meeting statement, the Fed noted signs of a cooling labor market and a slight uptick in unemployment, coupled with reduced inflationary concerns. The Fed’s focus has now expanded from primarily addressing inflation risks to a more balanced consideration of both inflation and employment risks.
During the post-meeting press conference, the Fed emphasized that if inflation continues to decline as expected, with economic growth remaining solid and the labor market holding steady, a rate cut could be discussed at the September FOMC meeting. Additionally, the Fed may adopt a gradual approach to lowering rates in the future. The Fed also noted that the labor market is gradually normalizing, and it aims to maintain the current employment situation without further deterioration. Therefore, key employment metrics, such as the unemployment rate and initial jobless claims, will be closely monitored.
Market expectations are now firmly anchored on a potential rate cut in September, with FedWatch data indicating an 87.5% probability of a quarter-point cut. The Fed is expected to continue a “wait-and-see” approach, gradually adjusting its policy based on ongoing economic conditions.
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(Photo Credit: Federal Reserve)
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