Further Indications of Solid Spending

Earlier this week, the latest retail sales report indicated a resurgence in consumer activity with control group sales up 0.9% in June, the most in 14 months. 

Reinforcing the notion of a resilient consumer, despite a 23-year high in rates and still elevated prices, Amazon has reportedly set a new “Prime Day” record, selling more during its two-day event than ever before. According to Adobe Analytics, consumers spent $14.2B July 16-17, up 11% from last year. 

As the backbone of the U.S. economy, ongoing solid spending supports the prospects of positive growth for the second quarter and beyond. However, on the flip side, such robust spending undermines the notion that the Fed’s current stance of policy has done enough to slow the consumer in order to result in a sustained, lower pace of inflation.

Policy makers – and investors – were buoyed by a cooler-than-expected June CPI report, suggesting a September rate cut is not only on the table but increasingly likely. However, with a hotter-than-expected read on the PPI and import prices suggesting still elevated price pressures, conditions clearly fall short of the Committee’s threshold of “many” good months of data needed to instill confidence in a sustained disinflationary trend. Furthermore layering on continued strength in spending, a near-term rate reduction may not only be unjustified, at least in the next 60 days, but potentially counterproductive in the longer-run quest for price stability given the current level of rates is clearly not yet having the desirable and more substantive retarding impact on spending. 

Of course, that’s not to say the Fed can’t or won’t cut rates nor should they wait to reach 2% before taking action. But optimism – or desperation – aside, the current stance of economic conditions do not yet indicate a reason, let alone a need, to reduce policy firming anytime soon in an effort to support or perpetuate the domestic economy. 

Speaking of policy decisions, yesterday, the European Central Bank (ECB) opted to hold rates steady with its deposit rate at 3.75%, main refinancing rate at 4.25%, and marginal lending facility at 4.50% after lowering rates 25bps in June for the first time since 2019. While the ECB’s decision to hold rates steady was widely anticipated, ECB President Christine Lagarde hinted at least for the potential for further relief to come later in the year with the statement affirming the “Governing Council is not pre-committing to a particular rate path.”

Speaking at the press conference following the statement release, Lagarde said, “The question of September and what we do in September is wide open and will be determined on the basis of all the data that we will be receiving…If that data actually confirms the disinflationary process that is at work in the moment, it will reinforce our confidence.” 

Recall, amid sluggish growth and encouraging signs of disinflation, the European Central Bank opted to cut rates in June after hiking rates 450bps over 14 months. Of course, even with a first-round cut, given a recent pickup in labor costs suggests the ECB is widely expected to take a tempered approach to subsequent reductions and the future pathway of policy. Down from an earlier forecast of six rate cuts at the start of the year, market participants now anticipate just one or two reductions in the remaining five months of the year. 

The European economy has been sluggish for some time, with two consecutive quarters of negative growth at the end of last year. More recently, however, activity levels have improved, rising 0.3% in Q1 with expectations for an average 0.7% pace throughout the year. Meanwhile, inflation has slowed markedly in the Eurozone from a peak of 10.6% in October 2022 to 2.5% as of June.

Back in the U.S., yesterday on the economic calendar, initial jobless claims rose 20k from 223k to 243k in the week ending July 13, the largest increase since early May. The four-week average, meanwhile, rose from 234k to 235k. Continuing claims, or the total number of Americans claiming ongoing unemployment, increased from 1.85M to 1.87M.

Also yesterday, the Philly Fed Business Outlook Index jumped from 1.3 to 13.9 in July, surpassing the expected gain to a reading of 2.9 and a three-month high.

In the details of the report, prices paid fell from 22.5 to 19.8, a two-month low and averaging 17.4 over the past six months, while prices received jumped from 13.7 to a reading of 24.2 in June. Also, the number of employees rose from -2.5 to +15.2 in July, the highest reading since October 2022, and new orders gained from -2.2 to +20.7 at the start of Q3.

Finally yesterday, the Leading Indicators Index declined 0.2% in June, slightly less than the 0.3% decrease expected and following a 0.4% drop the month prior.

This morning, the economic calendar is empty.

Next week, the economic calendar begins on Monday with a look at the Chicago Fed National Activity Index.

On Tuesday, the Richmond Fed Index, along with June existing home sales will be released.

Later in the week, on Wednesday, weekly mortgage applications, wholesale inventories, the S&P Global U.S. Manufacturing, Services, and Composite PMIs, and June new home sales.

On Thursday, weekly jobless claims along with a highlight for the week – the preliminary Q2 GDP print. GDP rose 1.4% at the start of the year. While still signaling an ongoing positive rate of growth, the domestic economy has clearly lost momentum, slowing from 4.9% in Q3 of last year to 3.4% at year-end to now less than 2%. In the preliminary, Q2 report, GDP is expected to rise 1.9%.

Also on Thursday, June durable goods orders, along with the Kansas City Fed Manufacturing Activity Index.

Wrapping up the week Friday, the June personal income and consumption report, along with the PCE – the Fed’s preferred inflation gauge. Personal consumption is expected to rise 0.3% in June and 4.9% on an annual basis, a potential downtick from the 5.1% annual gain in May, albeit still very solid on a nominal basis. Income, meanwhile, is expected to rise 0.4% in June and 4.8% year-over-year, a potential uptick from the 4.6% annual gain in May.

The PCE is expected to rise 0.1% in June following a flat reading the month prior, and potentially increase 2.5% on an annual basis, a tenth of a percentage point lower than the pace reported in May. Stripping out food and energy, the core PCE is expected to rise 0.2% in June, following a lesser 0.1% gain the month prior, and potentially increase 2.5% year-over-year, down from the 2.6% annual increase in May.

Also, on Friday, the final University of Michigan Consumer Sentiment Index for July will be released, potentially marking the fourth consecutive month of waning momentum.

Finally, on the Fed-speak front, Fed officials will enter their scheduled blackout period ahead of the July FOMC rate decision, now just 12 days away. While the Fed is widely expected to hold rates steady in July, the focus will be on the rhetoric, potentially giving further insight as to the Committee’s expectations for a policy directive in September. 

-Lindsey Piegza, Ph.D., Chief Economist