Economics Weekly June 17, 2024
Inflation falls, but the Fed remains cool on rate cuts
Expectations on the outlook for the Fed Funds Rate experienced a rollercoaster ride last week. The latest data showed Consumer Price Index (CPI) inflation slowed to 3.3% in May, down from 3.4% in April, defying a Wall Street forecast of no change. Meanwhile Producer Price Index inflation (often referred to as factory gate inflation) slowed from 2.3% in April to 2.2% in May. However, on announcing no change to the Fed Funds Rate last Wednesday, rate setters at the Federal Reserve published forecasts indicating that most of them believe there will only be one rate cut this year. Back in March, they were forecasting three cuts. Also, the tone of the comments from Fed Chair, Jerome Powell, at the subsequent press conference was interpreted as hawkish. This has called into question the likelihood of a September interest rate cut. We believe the first cut to the Fed Funds Rate will occur in November.
Also published last week was the NFIB Small Business Optimism Index, which reported an increase from 89.7 in April to 90.5 May. This was ahead of Wall Street’s forecast of little change at 89.8. Respondents to the survey pointed to inflation as the number one problem faced by small firms, providing further evidence that price rises remain a significant pressure on the economy. The survey also reported an increasing number of businesses are hiring more staff. From a real estate perspective, the index figures are mostly encouraging and could point to increased leasing demand in the future.
This week sees the release of the PMI Index data for the US. This is a survey of firms whose results are compiled into an index whose convention is that a reading above 50 indicates growth. The figures for May for the US were remarkably strong, and given interest rates remain high and inflation elevated, we are predicting a moderation in June. Nevertheless, the US numbers will probably still compare favourably to other major global economies.
Things to watch for this week
Tuesday, June 18
Retail Sales, m-o-m, May
Previous: 0.0
Forecast: 0.2%
Following disappointing figures in April, we are forecasting retail sales strengthened in May as inflation eased.
Industrial Production, m-o-m, May
Previous: 0.0
Forecast: 0.2%
Globally there are now signs of improvement in industrial production, which probably indicates international trade is improving. We expect the US figures to match the global trend.
Friday, June 21
US ‘Flash’ Composite PMI, June
Previous: 54.5
Forecast: 54.2
The May figure at 54.5 was remarkably strong, so we are predicting a small reduction in the PMI figure, albeit to a level still well above the pivotal 50 mark.