Recession Fears Easing Up?
- This summer’s fears about escalating trade tensions, slowing global growth and an inverted yield curve have let up somewhat as risk-on sentiment made a comeback this week.
- With a growing string of economic data coming in above expectations, the 10-year yield has risen 41 bps since reaching a low of 1.46% last Tuesday. The S&P 500 is now just a few points from its all-time high.
- Control group retail sales rose 0.3%, setting up consumption for another strong reading in Q3, likely around 3%.
- CPI inflation is heating up, but will not deter the Fed from easing next week.
Recession Fears Easing Up?
This summer’s fears about escalating trade tensions, slowing global growth and an inverted yield curve have let up somewhat as risk-on sentiment made a comeback this week. With a growing string of economic data coming in above expectations, the 10-year yield has risen 41 bps since reaching a low of 1.46% last Tuesday. The S&P 500 is now just a few points from its all-time high. Has imminent Fed easing staved off recession fears?
Markets were likely buoyed by the latest news this week of cooling trade tensions. The consumer, however, continues to be mostly unfazed by the trade war altogether. August retail sales rose 0.4%, off an upwardly revised 0.8% gain in July. Control group sales rose 0.3%, setting up personal consumption for another strong reading in Q3—we now see decent upside to our current PCE forecast of 2.9%. This is slightly softer than the 4.7% annualized pace in Q2, but is more than enough to hold up the broader economy amidst the weakness in the cyclical and trade-exposed sectors like manufacturing and transportation & warehousing.
Meanwhile, monetary policy hawks will be sure to point out that CPI inflation is beginning to heat up more materially. Core prices rose 0.3% for the third straight month, pushing the three-month annualized inflation rate to a 13-year high. The year-over-year rate hit 2.4%, which suggests PCE inflation—which tends to run about 0.3 percentage points below CPI inflation—may finally be at the Fed’s target. A few quirks boosted the number, including surging used auto and airfare prices, which we expect to cool in coming months. The rise in goods prices is more important. Core goods had generally been in outright deflation since 2013, but prices are now rising almost 1% over the past year, clearly illustrating the pass-through of tariff costs to the consumer, even before a much broader tranche of goods is subject to higher import taxes.
The NFIB small business confidence survey fell modestly to 103.1, off its cycle high of 108.8 one year ago, but it is still consistent with solid economic growth. Small business owners increasingly see a divergence between conditions today and what they expect in the future—reported sales and earnings remain strong, but hiring and capital spending plans have come down.
Consumer spending—which drives two thirds of the U.S. economy—is growing solidly, core inflation is at a decade high and the stock market is just below a record high. Yet, a Fed rate cut next week is all but locked in. Moreover, we now expect two more cuts after that. The inflation pick-up may generate greater dissent among the FOMC, but it has been moving towards “average inflation” targeting, meaning the Fed would tolerate, or even welcome, above-2% inflation. That rationale is additional cover for it to act more decisively to counteract trade war uncertainty and any contagion from economic weakness overseas—insurance cuts, in other words. The consumer is bearing the weight for now, but job openings are down by over 400,000 since peaking last year and job growth is slowing. More importantly, this week’s ‘trade tensions easing’ tweet is next week’s ‘trade tensions escalating’ tweet. Powell has admitted there is no playbook for such a mercurial president, and additional rate cuts seem to be his best move.
Industrial Production • Tuesday
The impacts of slowing global growth and the ongoing trade war are most clearly evident in the manufacturi