Investors’ nerves have recently been calmed by stabilizing economic data. But both the outlook for the economy and monetary policy remain unusually uncertain, meaning more volatility may be in store.
While retail sales saw a surprising surge in July, the prospect of a soft landing increased this week as data showed consumer price inflation continued to ease, in line with expectations.
Yet Thursday’s retail sales report wasn’t as good as it looked. The headline numbers rose 1% from a month earlier, with business sector figures crushing economic estimates of a 0.3% gain. But that was largely due to a rebound in auto sales, which took a hit after a widespread cyber attack on dealerships in June. Excluding motor vehicles and parts, retail sales rose just 0.4% in July.
Meanwhile, the central bank’s industrial production figures released on Thursday came in weak, showing a 0.6% decline in July from June. The Federal Reserve, which issues the report, said disruptions from Hurricane Beryl dragged the figure down by 0.3 percentage points. Even stripping that out, the decline was worse than expectations for a 0.1% drop. June’s reading was also reduced.
The reality is that while a hard landing may not be imminent, it is currently unclear to what extent economic momentum is actually slowing. This makes the market’s apparent high level of confidence in the Federal Reserve seem odd.
It seems everyone now agrees that a rate cut is coming in September. But there was intense debate at the meeting about how much the Fed would do and how quickly it would proceed to cut rates. According to the CME FedWatch tool, markets are currently pricing in a 27.5% chance of a half-point cut, which would be larger than a typical quarter-point move. But a week ago markets indicated a 55% chance of a half-point cut.
Uncertainty naturally grows when one tries to predict Fed actions. As the central bank is effectively switching between policy positions, it doesn’t give central bank watchers much to say about how it will proceed. No one can say with any degree of confidence, except that prices will be lower a year from now.
This means that markets are likely to suffer more disruptions than they have already experienced. Recent experience has shown just how sharp those disruptions can be: hawkish rhetoric from the Bank of Japan spurred the yen higher, a pause in carry trades and stocks’ most volatile week in years. It’s a reminder of how changes in monetary-policy expectations can have large ripple effects.
The updated “dot plot,” which shows Fed policymakers’ consensus forecasts for the economy and rates, will come under more scrutiny than usual in September.
On Thursday, the S&P 500 was on track for its sixth straight day of gains and was just 3% shy of the all-time high reached in mid-July. Investors should face a little more volatility.
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„Oddany rozwiązywacz problemów. Przyjazny hipsterom praktykant bekonu. Miłośnik kawy. Nieuleczalny introwertyk. Student.