The highlight of economic releases this week was the announcement of the first interest rate reduction by the Federal Reserve since the onset of the Covid-19 pandemic in March of 2020.
On Wednesday, the Federal Open Markets Committee (FOMC) cut the Fed Funds Rate by 0.50% to a range of 4.75 – 5.00%. Although widely anticipated, the magnitude of this first rate reduction was more than many market participants expected. Estimates were split between a cut of 0.25% and 0.50%. Chair Jerome Powell reiterated previous statements acknowledging that monetary policy has shifted into a more balanced approach addressing price stability and full employment in tandem. It should also be noted that on Wednesday the Fed released the quarterly Summary of Economic Projections (SEP) which now forecasts a substantially lower median Fed Funds Rate expectation among Fed Governors in 2025 from the previous range in June of 3.9 – 4.4% to 3.1 – 3.6% in September. This was driven by lower inflation expectations and a higher projected unemployment rate. Our view at Chandler is for the Fed to continue to lower rates at a measured pace through this year with the ability to move more aggressively should the employment data warrant.
Housing starts picked up and surprised to the upside on a month-over-month basis increasing 9.6% versus the previous decline of 6.9% the prior month. Activity increased in the pre-construction phase as well as Building Permits increased 4.9% month-over-month versus the prior -3.3%. Yet, Existing Home Sales fell 2.5% month-over-month.
Although signs have slowly begun to show the labor market weakening, the weekly data for Initial Jobless Claims and Continuing Claims continued to remain near the lowest of the past 20 years; this week resulted in healthy levels of 219,000 initial job losses with 1,829,000 continuing claims.
Retail Sales continue to exhibit positive signs for growth. On a month-over-month basis, Retail Sales increased 0.1% while consensus estimates called for a decrease of 0.2%. More telling, the Control Group increased 0.3% month-over-month after last month’s data was revised higher to an increase of 0.4%. The Control Group is a subset of the broader Retail Sales data which excludes certain categories that are more acutely affected by seasonality or volatility, giving a more stable assessment of sales. Ecommerce contributed the most to the increase.
The Leading Index also improved marginally yet remained in negative territory at -0.2% from the previous level of -0.6%. The improvement can be attributed to a decrease in the yield curve inversion, an increase in building permits, and stock market performance.
This week, the yield curve continued to exhibit the recent bull steepening trend that has developed over the past few months with the 2-year US Treasury yield ending the week at 3.57% and the 10-year US Treasury yield at 3.72%. The 2YR/10YR yield spread normalized ending the week at +15 basis points, while the front-end of the yield curve remained inverted with the 2YR/5YR spread at -9 basis points.
Next week: Chicago Fed National Activity Index (CFNAI), S&P PMIs, S&P Core Logic Cash-Shiller 20-City HPI, Consumer Confidence, New Home Sales, GDP 2Q update, Durable Goods Orders, Jobless Claims, Personal Income, Personal Spending, Personal Consumption Expenditures Index (PCE), University of Michigan final update for September Consumer Sentiment
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