The July 15 week will see the release of a number of economic data reports that Chair Powell mentioned in his semiannual monetary policy testimony as important to the outlook for rates. However, at this stage, even a series of robust numbers in critical areas are not likely to derail the FOMC from adjusting the fed funds rate down by 25 basis points. Past storm clouds on the economic horizon from trade policy and slow global growth are still there. Now it looks like there will be another contentious battle in Congress to get a budget passed and/or the debt limit increased before September deadlines. Added uncertainty calls for a little reassurance that the Fed is monitoring events and prepared to respond appropriately.
Not all policymakers are going to support a rate cut on July 31, but a majority of voters are expected to. The July 15 week is the last before the start of the communications blackout period around the July 30-31 deliberations. At least a few are scheduled to speak and press outlets are going to solicit comments from the others. The blackout period begins at midnight on Saturday, July 20 and runs through midnight on Thursday, August 1.
I would listen carefully to the moderate-to-hawkish spectrum of Fed officials. A series of solid data reports could lead them to a one-and-done attitude about reducing short-term interest rates unless there are more persistent and persuasive reports of growth slowing significantly below the SEP’s baseline forecast of 2.1% for 2019 and 2.0% for 2020. The Fed sets policy to achieve the dual mandate. The labor market is strong even with a little softening from spectacular numbers last year. If inflation is running below the 2% objective, that could change quickly if some of the transitory factors cited for earlier this year start to dissipate and/or commodities prices climb in a trade war.
Policymakers will give a close read to the next edition of the Beige Book when it is released on Wednesday at 14:00 ET. The information is anecdotal, but it does provide a clear sense of the health of economic activity across the 12 Districts. In the last report issued on June 5, 92% of the District Banks report at least some growth in the regional economy. The Beige Book is a good predictor of turning points in the US economy. The performance for 2019 to-date does not suggest that activity has done more than reset at a lower – but still acceptable – level of growth.
One of the bright spots in the economy in the second quarter so far has been consumer spending. The data on retail and food sales for June at 8:30 ET on Tuesday. The month-over-month increase in the dollar value of sales probably won’t match the up 0.5% of May, but some of that will be due to falling gasoline prices. Motor vehicle sales were down a tad in June from May and overall would not be much of a decrease except that there was also a slight increase in purchases of less expensive passenger cars relative to pricier vehicles in the light trucks category. Nonetheless, warm weather and an upcoming holiday on July 4 probably inspired consumer to purchase seasonal goods like summer clothing, sporting goods, building materials for gardens and home repairs, and appliances like fans and air conditioners. Spending could look solid at the “core” – sales excluding motor vehicles, building materials, and gasoline.
Revival in the housing market should look sustained in the next batch of data. Recent sharp declines in mortgage interest rates have given consumers a reason to consider buying a home now rather than later, especially with prices continuing to increase steadily. The NAHB/Wells Fargo Housing Market Index for July at 10:00 ET on Tuesday could manage to rise after the dip to 64 in June from 66 in May. Builders could report increased prospects for current and expected sales, and buyer traffic is likely on the rise.
Housing starts in June at 8:30 ET on Wednesday are anticipated to be higher. Starts still face the long-term challenges of finding land to build on and workers to do the construction, but with limited supplies of existing units, builders will be motivated to meet demand for first-time buyers who more usually are in the resale market. While remaining below the near-term peaks seen in 2018, starts should reflect healthier conditions after the drop in late 2018 when mortgage rates were higher. Permits-issued in June should remain about on trend, hovering right around the 1.3 million unit (SAAR) mark.
The first of the monthly surveys of manufacturing in July will be the New York Fed’s Empire State Survey at 8:30 ET on Monday, and the Philadelphia Fed’s Manufacturing Business Outlook Survey at 8:30 ET on Thursday. Both showed a significant softening in conditions in June that was probably due to activity being moved up to May in anticipation of higher tariffs and supply chain disruptions in May. The July index readings could return to something in line with modest expansion.
The New York Fed’s Business Leaders Survey for July at 8:30 ET on Tuesday will provide an early read on activity in the service sector. Similar to the manufacturing survey, the region saw a steep dip in activity in June to 5.8 that followed after a strong 20.6 in May and likely was part of the trade and tariff uncertainties. However, activity is expected to rebound a bit and expand modestly in July.
If there is a positive for Industrial Production and Capacity Utilization in June at 9:15 ET on Tuesday, it is likely to be in utilities. Many parts of the US experienced hot weather in June that would have been met with heavy demand for air conditioning. Manufacturing activity is likely to remain slow, and mining little changed.
Like other price indexes, the Import Price Index for June at 8:30 ET on Tuesday should fall on softer prices for energy. Crude oil prices fell for another month and will restrain overall import prices at the headline. Prices excluding energy goods will probably be stable with little change in the value of the dollar from the prior month.
The preliminary University of Michigan Consumer Sentiment Index for July at 10:00 ET on Friday will probably regain some of the confidence lost in June. The June final index was 98.2, down 1.8 points from the prior month. Worries about a future deterioration in the labor market will have retreated a bit, but other concerns about six months from now probably will not be alleviated to the same extent. However, Consumers remain quite optimistic about the economy in spite of some month-to-month fluctuations. The measures of inflation expectations will probably remain low and recent increases in gasoline prices should prevent them from falling.
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