In the August 5 week, equity markets did not get a chance to recover from the disappointment of a 25 basis point rate cut from the FOMC on July 31 that was followed by no indication that the consensus of Fed policymakers had an appetite to make that the start of an easing cycle, and then President Trump announcing yet more tariffs on trade with China on August 2. The situation was compounded when the Trump Administration took the step of branding China a currency manipulator on Monday and then ramped up the rhetoric. Unease was cemented when several major central banks either talked about easing or actually do so like the Reserve Bank of New Zealand with a surprise 50 basis point cut in its official cash rate.
The unease in financial markets was matched by the horrible news out of El Paso and Dayton that has kept many people on edge and contributed to a contentious political environment that won’t help consumer and business confidence.
In any case, the consequent flight to safety has lowered Treasury yields, which in turn has meant consumers are getting a break as interest rates decline, especially for home mortgage rates. There was a renewed wave of refinancings which could help household budgets and improve discretionary incomes. Add this to a strong job market and continued rising wages and it could be that consumer spending will be the bright spot of the US economy in the third quarter as well. Businesses are likely to remain reluctant to invest in real estate, equipment, and software even with favorable lending rates unless and until the current belligerent situation for trade and currency policy is toned down and resolved.
There were few Fed policymakers on the calendar in the week and of these only two spoke about monetary policy. Both St. Louis’ James Bullard and Chicago’s Charles Evans are on the dovish side of interest rate policy. It was no surprise that both of them are leaning toward further rate cuts this year. However, although he didn’t use that exact language, Bullard did not sound entirely like he was against treating the July 31 rate move as a midcycle adjustment, not necessarily to be seen as the start of an easing cycle. Given developments in trade and currency policy since the FOMC decision, it increases the likelihood of further rate cuts. But it would be unwise to rely on these as long as the economic data points to GDP growth somewhere near 2.0% for 2019 while the labor market is solid and inflation low, but not falling.
The week’s economic data was scanty and mostly of the second-tier variety.
The highlight was probably the ISM Non-Manufacturing Index for July which declined to 53.7 from 55.1 in June and was the lowest since 52.9 in May 2016. The ISM noted that the non-manufacturing sector has reported expansion for 114 straight months. Compare this to the 35 straight months of expansion for the manufacturing sector. Services have seen some slowdown associated with the lingering challenges of trade and tariff policy and slower global growth. But these have had less of an impact for services than manufacturing. Since services accounts for roughly 80% of all employment, its continued health could keep the US from slipping into outright recession. At least for the time being.
If the data on Job Openings and Labor Turnover (JOLTS) was a bit softer in the report for June, it was entirely expected and unremarkable since with July Employment Situation has reassured that the labor market is not on the verge of substantive deterioration. The decline in the number of job openings was in line with previously published data and was not more than a minor dip to levels just short of record highs. The Beveridge Curve continued to reflect a tight cluster of points that are representative of a labor market with little slack.
Initial jobless claims in the August 3 week declined 8,000 to 209,000. After the noise in the data in July, the four-week moving average was little changed at 212,250 in the week. The level of new filings for benefits remain quite low by historical standards. The insured rate of unemployment was unchanged at 1.2% in the July 27 week where it has been since early May 2018. Like the JOLTS numbers, there is no hint that the labor market is anything but robust.
One of the justifications for lowering short-term rates cited by the FOMC last week was inflation running below the Fed’s 2% objective – the other was risks to growth from trade. The Final Demand Producer Price Index isn’t one of the more closely watched of the inflation indicators, but it is the first of the major reports for July. It reflected inflation running at up 1.7% — total and core – from the year-ago month. Commodities prices are less of a consistent source of upward pressure on prices while services provide steadier price increases.
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