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Look forward at September 9, 2019 week: Retail sales and inflation data will shape the outlook for rates

The September 9 week is part of the communications blackout period around the upcoming September 17-18 FOMC meeting. It runs from midnight on Saturday, September 7 through midnight on Thursday, September 19. The lack of public comment from Fed officials will probably not affect the outlook for a rate cut at the meeting, nor will the tone of the economic data. There’s enough gloom and doom in the first-tier reports in the last few weeks and in the more recent Beige Book that it is unlikely the Fed won’t deliver at least a 25 basis point cut in the fed funds target rate range from the current 2.00%-2.25%. To be sure, the August employment numbers weren’t bad, but they were disappointing relative to expectations. In the end, whatever lift markets get from confidence in the prospect of lower rates will have to be balanced against worrisome developments in the economy and that an outright recession is closing in, not just a period of softer growth.

The data on retail and food sales in August are actually likely to look quite good. Consumer spending was the mainstay of growth for the second quarter and is shaping up to be much the same in the third. August started off with heavy back-to-school sales promotions to take advantage of sales tax holidays in a few states. This doesn’t necessarily translate into spending on clothing and accessories which often waits for the start of the school year. But it does lead to stocking up on classroom supplies which includes personal electronics. The period of exceptionally hot weather in August probably helped clear out the remaining summer merchandise for many retailers. Consumers were also fairly active travelers in the month and likely spent on restaurant meals and accommodation. If the price of gasoline continued to decline in August, purchases of gas were up and should make up the difference in dollar sales. Sales of motor vehicles were also a bit stronger in August after a soft July, and consumers bought more units of pricier light trucks than they did in the prior month. Altogether, even if the economy is underperforming for manufacturing and services, consumers haven’t yet started to close their wallets in anticipation of a recession.

The inflation indicators for August will probably remain about on trend. The Final Demand PPI at 8:30 ET on Wednesday, Consumer Price Index at 8:30 on Thursday, and Import Price Index at 8:30 ET on Friday will all tell a similar story about falling energy prices keeping overall price pressures tame. Price pressures from commodities will remain largely absent, while services is the main source. The CPI may also give a hint if price pressures for housing – about a third of the index weight — have abated at all.

The data on Job Openings and Labor Turnover for July at 10:00 ET on Tuesday won’t add much that is fresh to the picture of the labor market. The level of job openings should remain high, if below recent records. Hiring has been brisk. Separations may be on the rise slightly and voluntary job quits a bit lower. Altogether, there should be as yet little sign of increased slack in the labor market.

The NFIB Small Business Optimism Index surprised with an increase to 104.7 in July from 103.3 in June, possibly reflecting anticipation of a resolution of trade talks with China that did not materialize. Thus, the August index at 6:00 ET on Tuesday will probably back down from there. This should not be read as small businesses lacking in optimism, but a recalibration based on present conditions and expectations for near-term activity.

The preliminary University of Michigan Consumer Sentiment Index for September at 10:00 ET on Friday may be a bit higher than the 89.8 in August, a low not seen since late 2016. Consumers remain very positive about current conditions that include a favorable labor market and falling interest rates. However, their confidence in the outlook six months from now was badly rattled in August with a negative news cycle and disturbing geopolitical developments. The present is probably going to look pretty much the same to consumers and the near future could be a bit less gloomy as well.

Falling gasoline prices are likely to make consumers’ 1-year inflation expectations lower in September after the 2.7% in August, while 5-year expectation will likely look much the same as the 2.6% last month. The Atlanta Fed’s Business Inflation Expectations survey at 10:00 ET on Wednesday should remain little changed after the 1.9% median expectation in August. Neither will give the FOMC much reason for concern about inflation expectations coming unanchored at present in spite of heightened worries about a recession.

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