In the September 16 week, there is some tension ahead of the September 17-18 FOMC meeting. Doubts are few that the FOMC will provide another 25 basis point decrease for short-term rates. However, it will be against a backdrop of a divided Committee with a couple of policymakers calling for a 50 basis point cut at one end of the spectrum, and a couple preferring no rate action at the other.
What should be expected is that the middle ground of policymakers will agree to lower the fed funds target range by 25 basis points to 1.75%-2.00% but couch it in the language that Chair Jerome Powell used previously as a “mid-cycle adjustment”. The statement released at 14:00 ET on Wednesday will probably not be much changed from the one on July 31, if a trifle more downbeat. It is probably in the updates to the Summary of Economic Projections (SEP) that the extremes will be more obvious. Powell has recently said that the Fed is not projecting a recession in spite of heightened risks and that the FOMC will act to ensure that the expansion continues. It could be argued that there is no reason to provide accommodation if there is no recession on the near horizon. It could equally be argued that unless the FOMC acts to provide a little cushion for the expansion, a recession is more inevitable.
The SEP doesn’t usually move more than in small increments in the changes in quarterly forecasts, but the upcoming materials set for 14:00 ET on Wednesday might be an exception. Powell’s press briefing at 14:30 ET is likely to be a difficult one as the Chair tries to convey the policy consensus of a divided Committee, and that the FOMC is alert and prepared in the case of a downturn while not portraying conditions as inconsistent with modest growth. It is a balance that is likely to leave everyone dissatisfied. However, the available data within the context of the dual mandate doesn’t leave policymakers a lot of choice. The labor market is solid, if off the hectic pace of 2018. Prices are stable and inching back toward the Fed’s 2% objective, if frustratingly so. That leaves assessing the risks to the outlook, a tricky task that is difficult to quantify. Markets don’t like uncertainty, but that is what is bedeviling monetary policy deliberations.
The FOMC meeting is going to distract from a number of important pieces of economic data in the week.
The September New York Fed Empire State Manufacturing Survey is at 8:30 ET on Monday and the Philadelphia Manufacturing Business Outlook is at 8:30 ET on Thursday. Last month the respective general business conditions indexes were in line with mild-to-modest expansion and relatively steady conditions. If this continues into September, it could suggest that for at least these two Districts, the factory sector has settled into sluggish, but sustainable, expansion. There’s three more reports due from the Richmond, Dallas, and Kansas City Districts later this month, so the picture could change substantially. However, Fed policymakers will take into account if the factory sector looks to be sliding further, or if present weakness is stabilizing.
The report on industrial production and capacity utilization for August at 9:15 ET should confirm that low levels of new orders have kept manufacturing activity in check and the slower economic conditions and falling prices have cut into mining. The wild card may be utilities production where another bout of extremely hot weather blanketed large parts of the US in the month. However, July also suffered under a period of extreme heat so the month-over-month gain may not be significant.
The New York Fed’s Business Leaders Survey at 8:30 ET on Tuesday is for September and the first of the monthly regional surveys for the service sector. It isn’t the strongest indicator of the direction of services activity, but it has been reasonably steady in recent months and consistent with modest expansion. A similar reading to the 9.1 in August and 9.7 in July would help solidify that conditions are not deteriorating further for the US economy.
The NAHB/Wells Fargo Housing Market Index for September at 10:00 ET on Tuesday should provide a clue as to whether another decline in mortgage interest rates will keep homebuyers in the market this fall. The index rose to 66 in August, its highest since 66 in May and 68 in October 2018. The rate for a 30-year fixed mortgage has dropped 135 basis points from its near-term peak of 4.87% in November 2018 to 3.53% for September to-date. This should give potential homebuyers an incentive to commit to a purchase in spite of concerns about a possible recession. Supplies of homes have improved and consumers appear to have better bargaining power in setting a price.
Starts of new single family homes in August probably responded to the upswing in permits issued in the prior month. When the report is released at 8:30 ET on Wednesday, it should reflect that builders have responded to limited supplies of existing homes in the more sought-after sizes and price ranges with new stock. Building permits levels are likely to plunge in August, but only back to a more sustainable pace after a large jump higher in July.
Data on sales of existing homes in August at 10:00 ET on Thursday may not change much from the 5.42 million units in July. Contracts for home purchases have been plentiful and August will mark the closing of pending sales.
The current account balance for the second quarter at 8:30 ET on Thursday will round out what is known about international trade with the addition of remittances abroad. For the April-June period, trade in goods and services had a deficit of $163.3 billion, above the $156.5 billion in the prior quarter.
The Conference Board’s Leading Economic Index for August should see a positive contribution from the workweek, initial claims, and stock prices. It will get negatives from new orders, building permits, and consumer expectations. On net, it is likely to decline after the up 0.5% in July.
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