A string of upbeat US economic data out Thursday may be seen as casting still more doubt on the Fed’s capacity to deliver on market expectations for aggressive rate cuts without facing charges of overt politicization.
Retail sales rose 0.7% in July, more than doubling estimates and printing ahead of even the most optimistic forecast from 70 economists. The range was -0.4% to 0.6%. It was the fifth consecutive monthly gain.
The less-autos figure was 1%, against expectations of a 0.4% rise. The control group also saw its largest advance since March.
As a reminder, personal consumption shouldered most of the burden during the second quarter for the US economy. Signs of a resilient consumer are good news at a time when recession fears are rampant. In the same vein, Walmart reported results on Thursday that included impressive comps and upbeat guidance.
Meanwhile, the Empire manufacturing index beat estimates for August, coming in at 4.8, near the middle of the range of guesses forecasts. That’s up slightly from 4.3 in July, when the headline general business conditions index rebounded into positive territory after posting its largest monthly decline on record in June.
New orders rose, as did the employment gauge, although the latter stuck below zero for a third straight month. The outlook is still cloudy, though. “Indexes assessing the six-month outlook suggested that firms were somewhat less optimistic about future conditions than they were last month”, the New York Fed said. “The index for future business conditions fell five points to 25.7, and the index for future new orders also moved lower”.
Markets are palpably concerned that the global manufacturing slump will eventually make landfall in the US. An abysmal, contractionary Chicago PMI didn’t do much to alleviate fears (MNI’s barometer printed below 50 for a second month in July, stoking recession calls the day of the FOMC meeting).
Also on Thursday, the Philadelphia Fed said its manufacturing gauge beat estimates as well, printing 16.8 for August, near the upper end of the range and much better than the estimated 9.5. New orders rose to 25.8, but employment was weak. “Firms reported overall increases in manufacturing employment this month, but the current employment index decreased 26 points to 3.6, its lowest reading since November 2016”, the survey said.
Treasurys pared gains on the raft of better-than-expected data. Benchmark yields moved back to unchanged on the day and the dollar rose.
Unfortunately for the Fed, this just underlines a familiar dilemma. The economy is clearly holding up, but global uncertainty is running higher than ever, the yield curve is screaming “recession” and Donald Trump is just plain old screaming.
Thursday’s data comes two days after another hot CPI print, which raised questions about the notion that inflation is dead and buried, a narrative that helps underpin the case for rate cuts despite the resilient economy.
Now cue Larry Kudlow and Peter Navarro to explain that although the consumer is healthy and manufacturing is rebounding, negative rates would probably “be best” (to quote the first lady).
If the Fed doesn’t cut in September Trump will send Peter & Larry to see Jay and disembowel him!
The Fed is cutting in September without a doubt, but markets (especially bonds) are saying a quarter point cut isn’t enough. By the time Fed actually sees lagging data and acts with a huge cut and QE, the markets will have blown bast them in terms of negative rates expectations.
Q2 labor costs were revised massively upward today, the last couple of CPI prints came in hot, the Fed may want to try to preserve a little credibility, and there were dissenters at the last meeting anyway. It’s not a sure thing.
Lets see how “data dependent” they are.
“Now cue Larry Kudlow and Peter Navarro” That’s a big source of the current malaise. Peter Navarro has become the primary spokesman on economic policy, with Kudlow assisting. That’s hardly a confidence building duo.
Mnuchin suddenly absent. Is he on the way out to be replaced by Lou Dobbs?
I was thinking maybe Cramer or Maria.
Hannity.
One of the current theories related to yields crashing, is that there is a tsunami of Europeans buying treasuries as a hedge for risk, or a total meltdown with recession and Brexit. Is there anyone who can walk me through this and explain why someone with a currency, that has less value than the US dollar, would be buying treasuries at the highest price ever? Maybe I’m missing something with coupons and future value — but on the surface, for yields to have dropped as much as they have recently, there must be a a Yuge spike in volume and trillions of bucks being pushed into the safety zone. Has anybody done the math on this to understand how much money is moving yields this low? Are there craploads of people trying to get in front of the next rate cutfor liquidity purposes? Can someone please explain what the hell is going on??
global Japanification
There is truth to Eu banks buying US bonds, but not as a hedge against Brexit etc, rather as an investment. USTY are currently the best buy in a negative yielding world. It is a no brainer (no pun intended 🙂 ). Think of them as a swarm of locust, after they finished sending yields in EU negative their attention is now squarely on the US, and they will send them to 0 at least. US banks are nothing compared to EU banks firepower. It’s basically a hunt going on, not necessarily for yield but for treasuries any treasuries, as long as the coupon doesn’t say junk, i mean check out Greek yields and Italian, does anyone think it makes sense, they don’t care. So what happens with low yields? (Prof Mark Blyth has some fantastic lectures on this topic, on youtube check them out, i personally enjoyed them), basically low yields mean high volume the lower the yield the higher the volume, because in order to make the same return at a lower yield (higher bond price) one needs more money. As the yield drops volumes increase, and as volumes increase the yield drops even further and so on and so forth. What will happen next? Well basically the one thing that connects all the yields around the world is that they have one common buyer, mainly EU banks besides other sovereigns who are usual buyers and domestic funds. Now since leverage has been ramped up to their eyeballs and beyond, leverage like other times will turn out to be the problem this time as well. Once it blows up, and blow up it will, yields globally will shoot through the roof, what will happen then, just use your imagination. (Btw, these EU buyers, are nothing like people are accustomed to, they are not your PIMCOs etc, they are more like LTCMs on steroids, maybe not through arbitrage like LTCM did, but with similar leverage).