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Look forward to August 19, 2019 week: Chair Powell’s comments at Jackson Hole Symposium will have to strike a fine balance

The August 19 week has a light data calendar of which the numbers on home sales in July will be the highlight and keenly anticipated. However, deservedly or no, it is the FOMC meeting minutes that will capture markets’ attention, at least until Chair Jerome Powell delivers his address to the Kansas City Fed’s Jackson Hole Symposium (August 22-24).

The minutes of the July 30-31 FOMC meeting will be released at 14:00 ET on Wednesday. It is important to remember that the minutes are for discussions three weeks ago. There have been significant developments in the interim that will shape the outlook for the further rate cuts and the FOMC participants’ outlook for the September 17-18 deliberations. The decision to lower the fed funds target range on July 31 was driven by two main factors: trade uncertainty and soft inflation readings. There have been some gyrations on the topic of trade and tariffs but at present, additional tariffs on imports from China are being delayed until December. However, the data for global growth suggests that may not make much difference if export orders fail to revive. Recent data on inflation points to some slight increases in upward pressure and inflation expectations are stable, so there may be less reason for monetary policy to be more accommodative to defend the credibility of the 2% inflation objective. A lot can happen in the next four weeks and it is too soon to know if conditions have deteriorated to the point that the July 31 rate cut is shifting from a midcycle adjustment to the start of an easing cycle.

In the meantime, the meeting minutes will be parsed carefully to see just how divided were the opinions of FOMC participants on the necessity for the rate cut that was ultimately implemented. It is my expectation that these will show a solid minority – maybe a third of the 17 FOMC participants – were against a cut at the time, even as 20% of the ten voters registered a dissent. I would also pay close attention to the decision to end the program of reinvestments in the balance sheet two months early. It is unlikely there will be an explicit admission that it was to provide a little more accommodation via maintaining a larger-sized balance sheet. However, it might be one of the discussion points.

On Friday, August 23 at 10:00 ET, Chair Jerome Powell will address the Jackson Hole Symposium on the topic of “Monetary Policy in a Changing Economy”. It is probably too early to expect a strong signal about the Fed’s sense of the urgency for another rate cut, if it has one. There’s nearly four weeks before the next rate decision will be made and a lot of first-tier economic data in the interim. It is unlikely Powell wants to excite the present fears of a recession on the horizon, but he will also want to calm markets’ nerves with a message that the Fed is paying attention to the warning signs like the brief inversion of the 2-year/10-year yield curve. He will walk that particular tightrope with extreme caution.

As an aside, President Trump has yet to officially nominate either Christopher Waller or Judy Shelton to the Board of Governors. Admittedly the White House has a lot on its plate at the moment and the Senate is in recess. However, recent experience has shown that delays in formally putting the names to the Senate and starting the process is a fairly strong indication that these intentions will not come to fruition, or that the names in question will withdraw rather than deal with a lengthy and/or contentious confirmation. In any case, Shelton is probably not a viable nomination. Waller, on the other hand, could make it through, although he would face a tough battle in maintaining his independence as a monetary policymaker in the face of Trump’s undisguised desire for a loyalist on the Board of Governors. Also, the renomination of Governor Michelle Bowman for renewal of her term which ends on January 31, 2020 has advanced out of the Senate Banking Committee and is awaiting a vote by the full Senate. Her reconfirmation will probably go through without difficulty.

The relative health of the US economy in the third quarter may well rest on consumer spending on goods and services, and to a lesser extent the willingness to engage in the housing market. At this point it is fairly clear that businesses are dealing with a decline in demand and reluctance to invest in equipment and structures. Consumers, however, are evidently in a mood to spend after the July data on retail sales presented a solid upside surprise.

The July data on sales of existing homes at 10:00 ET on Wednesday and new single-family homes at 10:00 ET on Friday will tell if the third quarter is off to a good start in regard to residential investment. The labor market remains strong – for now – and household incomes are benefiting from steadily rising wages and benefits. Mortgage interest rates in July were among the lowest in over three years and are assisting in boosting home affordability. If housing prices remain on the rise, consumers have seen improved supplies and greater bargaining power. Conditions for homebuyers are about as good as they have been since the end of the recession and consumers remain confident. It remains to be seen if this translates into entry into the housing market.

 

The Kansas City Fed’s Manufacturing Index for August at 11:00 ET on Thursday will add to the regional data on conditions in the factor sector at the mid-point of the third quarter. The New York and Philadelphia reports suggest that activity has started to settle into a modest pace of expansion. The delaying of additional tariffs on goods from China until December 15 may encourage the factory sector to take advantage of the hiatus, but that announcement probably came too late to help the August surveys of manufacturing.

The Philadelphia Fed’s Non-Manufacturing Index for August at 8:30 ET on Tuesday will probably line up with only modest expansion for the service sector, but also that activity for services is steadier and firmer than that in manufacturing.

The Conference Board’s Leading Economic Index for July at 10:00 ET on Thursday should turn around from the 0.3% decline in June.  Unlike June, new orders probably won’t be a big positive, but they should not be the same level of negative. Initial claims for jobless benefits improved in July. Building permits should also not be a drag on the outlook after a strong rebound from June.

 

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