Fed to Market: We’re Getting “Closer” to Rate Cuts

Yesterday, retail sales were flat (0.0%) in June following an upwardly revised 0.3% increase the month prior. According to the median forecast, retail sales were expected to decline 0.3%. Year-over-year, retail sales rose 2.3% in June, the smallest annual gain in four months.

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Car sales fell 2.0% in June following a 1.0% gain the month prior, while gasoline stations sales dropped 3.0% in June, the second consecutive monthly decline. Excluding autos, retail sales rose 0.4% in June, the most in three months, and climbed 3.4% over the past 12 months. Excluding autos and gasoline, retail sales rose 0.8% and increased 3.8% year-over-year. Finally, excluding food, autos, building materials and gasoline station sales, control group sales rose 0.9% in June, the most in three months, and gained 4.1% over the past 12 months, the largest annual increase in three months.

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In the details of the report, non-store retailer sales increased 1.9%, building materials sales rose 1.4%, and health and personal care sales gained 0.9% in June. Also, clothing sales increased 0.6%, and furniture sales also rose 0.6% in June. Additionally, electronics sales rose 0.4%, as did general merchandise sales with a similar gain in department store sales, miscellaneous sales increased 0.3%, eating and drinking sales gained 0.3%, and food and beverage sales rose 0.1% in June following a 0.2% decrease the month prior.

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On the other hand, sporting goods sales fell 0.1% at the end of the second quarter following a 1.7% gain in May.

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Also yesterday morning, import prices were unchanged in June, despite expectations of a 0.2% decline, and export prices fell 0.5% at the end of the second quarter, more than the 0.1% decline expected. Over the past 12 months, import prices rose 1.6% and export prices gained 0.7%, both marking the largest annual increases since January 2023.

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Bottom Line: Yesterday’s sales report painted a significantly stronger picture of spending digging beyond the headline number. With core sales (ex. autos and gas) rising 0.8% coupled with upward revisions to the prior months, it’s clear the U.S. consumer remains solid. Such resilience will prove a?welcome support to growth in Q2 and beyond, but poses a challenge for the Federal Reserve desperate to provide relief from a 23-year high in rates.?

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Policy makers – and investors – were buoyed by a cooler-than-expected 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 62 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.?

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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. After all, Federal Reserve Chairman Jerome Powell himself appears increasingly focused on the ground already covered rather than the remaining pathway back to 2% or full employment. Noting again the substantial improvement in inflation coupled with a further cooling in the labor market, Powell said the Committee is going to be looking at both mandates. Speaking on Monday at the Economic Club of Washington D.C., Powell added, “They're in much better balance.”

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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. Thus, even if the Fed did opt to open the door to rate cuts as early as Q3, the Fed will likely be limited in action, disappointing investors’ hopes of returning to neutral or below sometime soon. Meaning, perhaps the Fed is able to eke out one or two rate reductions in the near term followed by a second-round extended pause.? ?

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Also yesterday, business inventories rose 0.5% in May, as expected and following a 0.3% increase the month prior.

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Finally yesterday, the NAHB Housing Market Index unexpectedly fell one point to a reading of 42 in July, a seven-month low.

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This morning, housing starts rose 3.0% in June, pulling the annual pace up from 1.314M to 1.353M, a two-month high. Starts were expected to rise 1.8%, according to the median forecast on Bloomberg. Single family starts declined 2.2% while multi-family starts jumped 19.6%. Year-over-year, housing starts fell 4.4% in June, the second consecutive annual decline.

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Building permits, meanwhile, rose 3.4% in June, pulling the annual pace up from 1.399M to 1.446M, a three-month high. Building permits were expected to increase just 0.1% at the end of Q2, according to Bloomberg. Single family permits fell 2.3% while multi-family permits rose 15.6% in June. Year-over-year, building permits fell 3.2% in June, the fifth consecutive annual decline.

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Also this morning, MBA mortgage applications rose 3.9% in the week ending July 12 following a 0.2% decline the week prior. The 30-year mortgage rate declined from 7.00% to 6.87%, the lowest level since early March.

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Industrial production rose 0.6% in June, double the rise expected and following a 0.9% increase in May. Capacity utilization, meanwhile, increased from 78.3% to 78.8% in June, a nine-month high.

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Later today, the Fed will release the latest version of the Beige Book likely underscoring that economic activity continued to “expand,” but that “conditions varied across industries and Districts.”

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On the Fed-speak front, Richmond Fed President Thomas Barkin and Fed Governor Christopher Waller spoke earlier this morning. Speaking to the Greater Prince George’s Business Roundtable, Barkin said he would like to move “deliberately” on interest rate reductions. Governor Waller, on the other hand, noted that the Fed was getting “closer” to cutting rates. Speaking at the Kansas City Fed, Waller said, “While I don’t believe we have reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted.”

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Tomorrow, initial jobless claims are expected to rise from 222k to 229k in the week ending July 13. The July Philly Fed Business Outlook Index is expected to rise from 1.3 to 2.9 in July and the June Leading Indicators Index is expected to decline 0.3% in June following a 0.5% decline the month prior.

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-Lindsey Piegza, Ph.D., Chief Economist