The Daily Update - Stronger Data but Still a Rate Cut

Yesterday we had stronger economic evidence from the US than market expectations, with retail sales up at 0.4% for the core and the ex-autos and gas measure rose in June by 0.7%, way above the 12-month trend. This release combined with upward revisions to previous months brought the quarter’s gains to the strongest since 2005. Industrial production also surprised on the upside and the NAHB housing index rose slightly, boosted by the lower rate environment. However, import prices fell again down 0.9% on the month and -2% year-on-year, suggesting the tame inflationary outlook remains in place. Many economists are raising their forecasts for the 2nd quarter’s GDP with such a strong showing from the consumer.

But does this change the chances of a Fed cut at month end? We don’t think so as the Fed is focussed on weakening global growth, risks stemming from trade and the persistently low inflationary outlook, we continue to look for a 25bp cut although many observers still think a 50bp move is justified.

Yesterday we had three Fed speakers; Chairman Powell repeated recent remarks that the Fed will act as appropriate amid increasing uncertainties, and act as appropriate to sustain the expansion. The Fed's Evans, a voting member, said that 50bp of cuts by the year-end may be appropriate to boost inflation and Kaplan, a non-voter, said that a rate cut could be warranted based on the signals coming from the bond market, but a potential rate cut ‘should be limited, and should be restrained’. If you remember last week, Bullard whom is a voting member and a well-established dove said he thought a 50bps cut would be ‘overdone’.

We feel that as the Fed does not meet in August, the September meeting is not until the 18th of the month, there is a long time in between meetings given the current environment and so an insurance cut of 25bp is warranted. The Fed could act in-between meetings but that would send the wrong signal to the market and smack of panic rather than control and planning ahead of the curve.

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