The July FOMC meeting isn’t the only big event on the US docket this week and for once, it may not even feel like it.
Wednesday’s Fed decision will come sandwiched between a dizzying array of data, all of which has the potential to move markets under the circumstances.
Most notably, Thursday could mark the unofficial (note the double italics) declaration of a recession in the US. Although consensus still expected the advance read on Q2 GDP to print in positive territory (figure below), a negative reading wasn’t out of the question.
If the economy grew in real terms last quarter, it did so at an anemic pace. On July 19, the Atlanta Fed’s GDPNow tracker was at -1.6%.
However it turns out, expect plenty of excuses for why growth is actually “better than it looks.” Bill Ackman provided a preview a few weeks ago, and it’s likely the White House will attempt to explain why the economy is stronger than headlines may suggest. In the end, it’s up to the NBER to decide what counts as a “recession,” and any such judgment isn’t imminent. “I’d be amazed if the NBER would declare this period to be a recession, even if it happens to have two quarters of negative growth,” Janet Yellen told NBC’s “Meet the Press” on Sunday.
It’s also worth noting that economists expect just 1.2% from Q2’s personal consumption print. When taken in conjunction with the sharp downward revision to Q1’s reading, investors are all but guaranteed to be left staring at a much weaker spending impulse. The figure (below), shows where consensus was prior to the first estimate of Q1 GDP (purple) compared to where personal consumption ended up following the final revision. The black dot is just consensus for the advance Q2 read.
On Friday, markets will get a more granular look, with June personal income and spending data. Retail sales for June were robust, but traders will be keen to gauge real personal spending on the heels of 2022’s first monthly decline (in May).
High frequency data suggests Americans are now pulling back even on staple purchases such as laundry detergent and shampoo in the face of generationally high inflation. “Home and personal-care sales volume may sink more as customers’ shopping bills mount,” Bloomberg Intelligence said this month.
Arguably, the most important data release this week is the Q2 employment cost index, which Jerome Powell cited in December during a dramatized retelling of the moment he changed his mind about the proper course of policy in the face of acute price pressures.
Q1’s print, 1.4%, was the hottest in recorded history (figure below), eclipsing the “old” record set “way” back in Q3 of 2021. Economists expect another scorcher from Q2’s headline.
A hotter-than-expected read could make any dovish tilt from the Fed on Wednesday appear misguided in hindsight to the extent persistent upward pressure on comp costs is indicative of a wage-price spiral that’s more entrenched than officials are willing to (publicly) concede.
And yet, in 12-month, constant-dollar terms, wages and salaries for all civilian workers and private industry employees fell 3.6% and 3.3%, respectively, in Q1, underscoring the notion that the “best” wage growth in decades is, in fact, the worst.
Meanwhile, “fresh” reads on home prices from FHFA and Case-Shiller will be heavily scrutinized. The scare quotes around “fresh” are a nod to the dated nature of the figures, which will reflect prices for May. It’s too late for the Fed to counter shelter inflation. It operates on a lag. The best the Committee can hope for is evidence that the pace of price appreciation is slowing, but as far as CPI goes, the die is cast — and likely through next summer (figure below).
The dramatic surge in mortgage rates is manifesting on a delay as many buyers locked in rates ahead of the storm, but last week’s spate of housing data was decidedly poor, and the likes of D.R. Horton are rolling out incentives to counter slowing demand in a spec market where construction isn’t under contract. “In June, we began to see a moderation in housing demand as mortgage rates increased substantially and inflationary pressures remained elevated,” the builder said last week, while reporting results that included a guidedown for deliveries and an uptick in cancellation rates.
In addition to the price indexes, housing market aficionados will be treated to new home sales data for June on Tuesday and pending home sales figures on Wednesday.
That’s hardly the end of it. Initial claims are becoming more important again after falling to what, for the purposes of trading the numbers anyway, may as well have been zero late last year. Claims are back above 250,000 for the first time since November and the four-week moving average is up to 240,500, the highest since December 4.
Also on deck: July consumer confidence, a trio of third-tier PMIs and the final read on University of Michigan sentiment for July which, with any luck, won’t include an upward revision to the cooler-than-expected preliminary read on inflation expectations, which the Fed will doubtlessly take into consideration on Wednesday when deciding against a full-percentage point rate hike.
Not cringing yet, but fingers crossed. Saw Yellen’s appearance with the Sunday talking heads. I appreciated her perspective, trying to speak in terms of the current facts, from her view, and manage expectations. But I’m sure it’s scary for a lot of folks, if only because of the volume and tenor of the talk. I’m concerned about real people losing real jobs. So far, that’s not materializing at scale.
Factoid: typical packaged food company in 2Q saw +15% cost input inflation, raised price/mix +13%, saw volume decline -2-3%, seeing positive shift from food-away-from-home back to food-at-home (exceeding the negative shift to private label) and trade-down from premium/fresh to mid/packaged, says supply chain disruptions improving but still high.
Thanks for the interesting factoids, especially the at-home vs away-from-home access to food. Makes sense.
The ongoing supply chain issues you cited also interest and concern me. The CCP is emphatically asserting itself in the Chinese supply chain issue, but not in a positive way. The Chinese property market financing mess during the past few years has festered into a banking mess in which the communist party is taking a blatant stand against Chinese property owners. They’ve actually used tanks to silence the complaints of stolen wealth expressed by their people. Even Apple will at some point have to scout a new supplier if the CCP is in the news like this on an ongoing basis.
How much of trading is by algorithm, and how sophisticated are those machines? Can they process the data in real time, or will it take a human to dial up the risk based on a “good number” or dial down the risk based on a “bad number”. I am used to people taking time to make up their minds about investments, but I think I am dating myself. Will we see 3% moves in the market on a daily basis?
Humans can set trigger levels for the machines, and then other machines respond to the moves. I mostly ignore daily moves now.
Algos are nano-second fast. Many companies that trade with these programs co-locate near electronic exchanges like BATS to cut trade times by, say 3-5 nano-seconds. You can’t blink as fast as these guys can trade a million shares.
I find it interesting that “consumer expectations” affect fed funds rates.
It’s also “interesting” that when wages grow at about half of realized inflation it is still seen as inflationary
Russia assumed it had Europe by the shorts with their dependency on Russia’s oil and gas. It will take time to replace all that energy but Europe will do that more or less depending on how long Putin lasts and Russia’s efforts to make amends. China is banking on the world’s dependency on China’s monopoly on manufacturing which would cause no end of pain if disrupted on a massive scale. But here again the world will not be held at gunpoint without reacting to negate the chokehold. It will take time but the factories in China will have to lay off hundreds of thousands as the orders dry up. It will be interesting to watch. The big advantage China has is it’s people are better educated and in the long run will dominate.