6/21/24 - Retail Sales and Fed Highlights Economic Moderation Concerns

In a week shortened by one day in celebration of the Juneteenth holiday, this week’s economic data was supportive of the narrative that the economy is continuing to moderate. Retail Sales data for May came in below estimates and pointed to a fatigued consumer. US retail sales increased just 0.1% after a downwardly revised 0.2% drop in the prior month. The retail sales control group data, which feeds into the quarterly GDP reading and excludes more volatile categories such as food services, rose 0.4% in May after falling 0.5% in the prior month. Overall, the report reflected a cautious consumer, that will continue to be influenced by inflation, and the uncertainty surrounding the ongoing strength of the labor market.

Earlier in the week, several Federal Reserve officials re-emphasized the need for more evidence that inflation is on a sustainable path of deceleration before lowering interest rates. Both New York Federal Reserve Bank President John Williams and Richmond’s President Thomas Barkin emphasized the importance of not just recent, but future economic data in determining the fed’s policy path moving forward. Fed Governor Adriana Kugler’s comments were slightly more specific regarding timing, she stated it would be appropriate to cut rates “later this year”. Overall, Federal Reserve officials’ commentary this week was consistent with last week’s release of the Federal Open Market Committee’s Summary of Economic Projections reflecting only one interest rate cut in 2024, down from three projected in March with four more cuts expected in 2025. In our view, a soft-landing for the economy remains our base case, however, if the Fed maintains a restrictive stance for too long, it will increase the chance of a policy error heightening the probabilities of a meaningful slowdown in the US economy.

On the labor front, initial applications for unemployment benefits were up slightly versus expectations. The Initial Jobless Claims report reflected 238,000 in the week ended June 15, above the estimated 235,000. The four-week moving average increased to 232,750, which is the highest level since last September. Continuing Claims also came in moderately higher than expected at 1.828 million for the week ending June 8th.

Reflecting economic stress from higher mortgage rates, housing data fell short of expectations this week. Housing starts decreased 5.5% to a 1.28 million annualized rate last month, and building permits fell 3.8% to 1.39 million. Sales of existing homes decreased 0.7% from the prior month to a 4.11 million annualized rate. It was the third straight month sales of existing homes declined as home affordability continues to plague the housing market. According to the National Association of Realtors, the median sales price increased 5.8% from last year to a record $419,300.

Treasuries experienced a brief sell off early Friday after US services activity expanded by the most in over two years. The S&P Global US Services Purchasing Managers Index (PMI) rose to 55.1, the highest level since April of 2022. In contrast to the PMI report, the Leading indicators for the US economy declined for the third consecutive month to -0.5% which was below the survey of Bloomberg economists of -0.3%.

Irrespective of weaker than expected retail sales and housing data, bond yields were little changed this week. At the time of writing, the 2-year US Treasury is trading at 4.73% and 10-year at 4.26%. Although markets will primarily be focused on the release of Personal Consumption Expenditures (PCE) next week. Consumer Confidence will provide another data point to consider possibly signaling additional evidence of a weakening consumer. For the past few years, consumers’ willingness, and ability to maintain spending has been a vital component of economic strength. Moving forward, the resiliency of the US consumer is a critical question for the economy and markets.

Next Week:

Philadelphia Fed Non-Manufacturing, Chicago Fed National Activity Index (CFNAI), S&P CoreLogic Case Shiller 20-City Index, Consumer Confidence, Richmond Fed, New Home Sales, GDP Q1 Third Estimate, Initial/Continuing Jobless Claims, Durable Goods, Pending Home Sales, Personal Consumption Expenditures (PCE), University of Michigan Sentiment

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