Fed Preview: No Surprises on Wednesday
Economic news and commentary for July 25, 2023
FOMC Preview
The Federal Reserve is convening its July meeting today to decide whether to maintain the pause initiated in June. Based on recent communications, including remarks made after the June announcement, the stage seems set for a 25 basis points (bps) increase during July's meeting.
According to the CME FedWatch tool, the market sees a quarter-point hike as a near certainty with a 98.9% probability assigned to that outcome which would bring the Fed fund target range to 5.25-5.5%. The remaining 1.1% probability lies in a highly unlikely 50 bps hike, which would elevate the rate to 5.5%-5.75%. The market has consistently leaned towards the 25 bps hike ever since the June meeting, where the probability of such a move was still substantial at 71.9%.
It is very difficult to go against the grain here and suggest that the Fed will disagree with the market mostly because it had done so much to indicate another hike was coming in July. Indeed, the latest FOMC member to speak, Christopher Waller, went out of his way in a speech on July 13th to refer directly to a rate hike this week when he said, “I see no reason why the first of those two hikes should not occur at our meeting later this month.” This comment serves as a clear indication of the Fed's intentions to move forward with a rate hike. Moreover, Waller also expressed his belief in the likelihood of two more 25 bps hikes before the year's end, further solidifying the central bank's hawkish stance.
While some might argue that the recent downside surprise in the June core CPI release should prompt the Federal Reserve to continue its pause, the current ring of policymakers has emphasized its commitment to showing that it will combat excess inflation. The Federal Reserve appears determined to reestablish its credibility as an inflation-fighting organization, and, in light of this objective, they have shown a willingness to lean towards a hawkish approach. Taking into consideration the overwhelmingly strong market consensus, coupled with the Federal Reserve's clear signals and commitment to addressing inflation concerns, I believe that the central bank will proceed with a 25 bps interest rate hike during its July meeting. This decision would signal the Fed's dedication to maintaining economic stability by tackling inflationary pressures.
Still to come…
9:00 am (EST) - US FHFA House Price Index
9:00 am - US Case-Shiller Home Price Index
10:00 am - US Conference Board Consumer Confidence
Morning Reading List
Other Data Releases Today
A net 14% of euro area banks tightened their credit standards in Q2 2023, down from 27% in Q1 2023 but still high historically. A net 18% tightened consumer credit standards, up from 10% previously.
The ifo Business Climate Germany fell to 87.3 in July, down from 88.6 in June. Sentiment is slowly shifting lower after recovering in early 2023. The Situation index fell -2.4 pts to 91.3, and the Expectations index fell -0.3 pts to 83.5.
The CBI Industrial Trends UK manufacturing output volumes index improved to 3% in July, up from -6% in June. This is the end of 5 months of contraction. The selling prices index eased sharply to 18% from 32% previously.
French construction sentiment worsened in July as the index of past activity declined -15 pts to -7, and the index of expected activity dropped -5 pts to -9. Both indexes are at or near lows not seen since early 2021.
The French index tracking demand for new homes fell to its lowest level since 2015 at -51 in July. Demand for housing in France has been in freefall since 2021.
German Ifo
The German economy is in a ‘slowcession’ and needs a new reform agenda (ING) - Another drop in Germany's most prominent leading indicator, the Ifo index, confirms that the economy is back on a downward trend before any upward trend had actually started. The case for a new reform agenda 2030 is getting stronger.
ECB Bank Lending Survey
ECB bank lending survey shows tighter conditions and weaker demand for loans (ING) - The second-quarter bank lending survey indicates that monetary tightening is having a significant effect on the lending channel. This adds to economic weakness for an economy that is already stagnating. While it should alleviate inflation pressures down the road, it is unlikely to sway the ECB from another 25 basis point hike on Thursday.
PMI
Flash US PMI signals growth slowdown but stubborn price pressures at start of third quarter (S&P Global) - July is seeing an unwelcome combination of slower economic growth, weaker job creation, gloomier business confidence and sticky inflation, according to flash PMI data compiled for the US by S&P Global.
Flash PMI signal further cooling of developed world economic growth in July (S&P Global) - Economic growth trends generally worsened at the start of the third quarter, according to the flash PMI surveys. US business activity growth slipped to a five-month low, the UK slowed to near-stagnation and the Eurozone fell into a steeper decline. Growth in Japan meanwhile held stuck June's four-month low. In all cases, encouragingly robust growth rates seen earlier in the year are showing signs of faltering as a persistent manufacturing malaise is accompanied by waning demand for services.
US
TDE Leading Economic Index: Navigating Uncharted Waters (TD Bank) - Some indicators have been pointing to a recession for a year now. Yet, the U.S. economy continues to defy expectations. TD’s Leading Economic Indicator is flashing a warning that we interpret as a period of slower growth, rather than increased risk of recession. The current economic cycle is characterized by atypical sectoral patterns due to the pandemic, now overlayed with the effects of rate hikes, which are clouding the usual economic signals.
Nuanced optimism and realism (EY Parthenon) - General labor market resilience, moderating inflation and gently slowing final demand growth offer hope of an economic soft landing. With headline inflation cooling rapidly, real wage growth is turning positive providing a tailwind to consumer spending. Simultaneously, the need to address supply shortages across the economy has supported robust construction activity, prevented a severe manufacturing pullback, and helped price and wage pressures ease.
Housing Demand Slows on Higher Rates and Prices (NAHB) - Mortgage rates’ slow –but steady– march upwards combined with the return of home price gains are doing what they are predicted to: slow housing demand. According to the latest Housing Trends Report, the share of adults with plans to purchase a home within a year dropped to 15% in the second quarter of 2023, down from a record high of 18% in the first quarter.
Still Growing (First Trust Portfolios) - No one should be popping champagne when they see Thursday’s GDP report. The good news is that it won’t be negative. The bad news is that even if it hits our estimate of 2.1% this is a far cry from the robust growth of the economic expansions in the 1980s and 1990s.
Rate Sensitive Sectors Struggle as E-commerce Boosts Retail Sales (Wells Fargo) - The FOMC’s balancing act became more daunting this week. Its rate hikes thus far still have not fully repressed consumer spending, but there are signs of fallout in other rate-sensitive parts of the economy, such as the industrial sector and housing. Is the economy in good shape or bad? The answer is both.
State Labor Markets Continued to Expand in June: A Rise in Unemployment Portends Potential Slowdowns Ahead (Wells Fargo) - The pace of hiring decelerated across states in June however a majority of states still registered payroll gains. A total of 38 states expanded headcounts over the month, equal to May's downwardly-revised count.
Is a College Degree Worth the Investment? (St Louis Fed) - College tuition outpaced inflation over the past few decades, making the cost of college rise relative to the price of other goods. So, is college still worth it? In other words, is the cost of tuition greater than or less than the economic benefits of a college degree?
Europe
ECB cheat sheet: Half a gear down (ING) - Another well-telegraphed hike from the European Central Bank brings another tough challenge for the Governing Council and Christine Lagarde: committing to another move in September or switching to full data dependency. We think the second scenario looks more likely, which may be read as a modestly dovish surprise and could weigh on EUR/USD.
ECB Preview - All eyes on September guidance (Danske Bank) - A 25bp rate hike from the ECB this week is essentially a given. This outcome has been well communicated in advance by most members, and should not in itself lead to any noticeable market reaction.
ECB Watch: Another hike but then what? (Nordea) - A 25bp rate hike at the ECB July meeting looks like a done deal, so all focus is on what the central bank will signal about the future. Will the ECB be in a pure data-dependent mode, or does it want to indicate that further hiking looks likely?
Europe Should Tighten Monetary Policy Further (IMF) - The European Central Bank could prevent inflation expectations from becoming unmoored and drifting upwards by continuing to raise its policy rate, as discussed in our recent report on the euro area. A further tightening of monetary policy in the near term would prevent much more costly measures later to bring inflation back to target.
Canada
Has the Bank of Canada Reached its Interest Rate Summit? (Wells Fargo) - The Bank of Canada (BoC) raised its policy rate 25 bps to 5.00% at last week's announcement, and while BoC Governor Macklem suggested the end of the tightening cycle was close, there were nonetheless several hawkish elements in the announcement. In particular, the Bank of Canada expects excess demand within the Canadian economy to persist for longer than previously anticipated, while also raising its CPI inflation forecasts.
Asia
Korea: 2Q23 GDP improved but with disappointing details (ING) - South Korea’s real GDP accelerated to 0.6% QoQ (sa) in 2Q23 from 0.3% in 1Q23, which was slightly higher than the market consensus of 0.5%. However, the details were quite disappointing with exports, consumption, and investment all shrinking. We expect growth to slow in 2H23.
Inflation
Inflation Monitor for July 24 (BMO) - Canadian headline inflation fell to the lowest in over two years, though sticky core measures mean that policy rates will stay elevated for some time.
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