Bostic Questions Market Expectations for Rate Cuts, Lower Inflation

The market may be misguided in its expectations for rate cuts this year as inflation is unlikely to subside as easily as investors anticipate, according to Atlanta Fed President Raphael Bostic. Speaking on Monday in an interview with CNBC, Bostic said he doesn't agree with the market’s call on how quickly price pressures will subside, but offered optimism about the potential for a soft landing.

?

“My baseline case is we won’t really be thinking about cutting until well into 2023. If you look at most measures of inflation, they’re still two times where our target is. And so that’s a long distance still to go,”?Bostic said.

?

According to?Bloomberg, investors continue to anticipate a series of rate cuts potentially beginning as early as July, despite a still elevated level of inflation more than double the Fed’s preferred 2% level.?

?

This morning, housing starts unexpectedly rose 2.2% in April, pulling the annual pace up from 1.37M to 1.40M, a two-month high. Starts were expected to decline 1.4%, according to the median forecast on?Bloomberg. Single family starts increased 1.6%, while multi-family starts rose 3.2%. Year-over-year, housing starts fell 22.3% in April, marking a full year of decline.

?

Building permits, however, decreased 1.5% in April, pulling the annual pace down from 1.44M to 1.42M, a three-month low. Building permits were expected to be unchanged in April, according to?Bloomberg. Single family permits rose 3.1%, while multi-family permits dropped 7.7 %. Year-over-year, building permits declined 21.1% in April following a 23.4% decrease in March, and marking the ninth consecutive month of decline.

?

According to the latest Federal Reserve Bank of New York Household Debt and Credit Report, total U.S. household debt rose by 0.9% to $17.05T in the first quarter of the year, rising nearly $3T from pre-pandemic levels.?In the details, mortgage balances climbed by $121 billion to $12.04 trillion at the end of March, and auto loan and student loan balances increased to $1.56 trillion and $1.60 trillion, respectively. Credit card balances, however, were unexpectedly flat at $986 billion.?

?

Also yesterday, retail sales rose 0.4% in April following a 0.7% decline the month prior. Year-over-year, retail expenditures are up 1.6%.?Auto sales rose 0.4% while gasoline sales plunged 0.8%. Excluding autos, retail sales rose 0.4% and 2.1% year-over year. Excluding both autos?and?gasoline purchases, sales rose 0.6% and 4.3% from this time last year.?

?

In the details, health and personal care sales rose 0.9% at the start of Q2, building materials sales increased 0.5% and general merchandise purchases gained 0.9% despite a 1.1% decline in department store sales.?On the weaker side, furniture sales dropped 0.7%m electronics fell 0.5% and sporting goods purchases dipped 3.3% in April.??

?

Bottom Line: While consumers are clearly accumulating more debt – understandably – as inflation continues to outpace wage growth, the starting point was one of relative health with household debt payments relative to disposable personal income dropping to a multi-decade low in the aftermath of the pandemic.?Which is to say consumers weren’t just buying electronics or Pelotons during the lockdown but also paying down debt.?Now, going forward, while few would outright advocate for consumers to take on new amounts of credit card debt, the household balance sheet clearly has additional runway to support further debt accumulation before it becomes a sizable red flag or impediment to spending activity suggesting the consumer may remain “resilient” for at least some time longer. Of course, as this April retail sales report shows, consumers are still spending thanks to a draw down in savings and a ramp up in debt however momentum is clearly waning.?

?

Also yesterday, industrial production rose 0.5% in April following a flat (0.0%) reading the month prior. Capacity utilization, meanwhile, rose from 79.4% to 79.9% in April, a five-month high.

?

Finally yesterday, the NAHB Housing Market Index rose five points to a reading of 50 in May, the highest reading since July 2022.

?

Tomorrow, initial jobless claims are expected to decline from 264k to 253k in the week ending May 13. Also, the Philly Fed Business Outlook Index is expected to rise from -31.3 to -20.0 in May. Additionally, existing home sales are expected to fall 3.2% in April from 4.44m to 4.30m, and the Leading Index is expected to decline 0.6% in April following a 1.2% drop in March.

?

?-Lindsey Piegza, Ph.D., Chief Economist?