Fed Watch – 5/24/2024

The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.

Hi, thanks for joining us for the May 24th edition of Fed Watch. I’m Brian Beaulieu from ITR Economics. This was another data-heavy week, and when you sum it all up, I looked at the latest monthly data, I looked at the trends that are in place, there’s nothing really compelling there in terms of the Federal Reserve to really inch them toward lowering rates in the second half of the year. But there wasn’t anything really that would say, “Oh, no, they’re less likely to lower rates.” It was sort of a vanilla month. You look at some of the numbers, we love doing things by the numbers, automobile production came back very strong in the April data, but that just made up for a really weak March, which we talked about in earlier recording. You balance those two out and it was pretty much business as usual.

Moving on from looking at auto sector, existing home sales in April were really okay. The three-month moving total rising trend is better than normal. The month-to-month change wasn’t anything great, but we’re still inventory-constrained, so there seems to be some underlying support demand there within the economy, even without seeing much in the way of a decline in interest rates. New homes for sale rose to their highest level. New homes now highest level in 16 years, so we’re seeing some movement in that inventory on that side of the marketplace. We’ll see how quickly that gets absorbed by the consumer, even with mortgage rates remaining relatively high.

The disappointing news in this past week was the Federal Reserve released to money supply data, we look at it deflated for inflation. The M2 measure showed the Fed is continuing to be, shall we say, parsimonious with liquidity. The money supply remains tight, it had a violence of plus one from the previous month, but it’s still running below a year ago levels. We’re not seeing the signs that I would like to have seen, certainly beginning in March that the Fed is turning, and while they may not be willing to lower interest rates, they’re willing to supply some more liquidity. Now, we’ve talked about before how they said they’re going to let more run off their balance sheet, so we may see some improvement in April or May, but it would’ve been great to see some in March and it just wasn’t there.

Permits were good for housing. They weren’t stellar, but they were good. We’ll have to see if we can build on a good month. In the latest data, we saw an unusual rise in permits, but again, it was because we saw an unusual weakness in the prior month, so on balance, it’s okay. It’s sort of like vanilla ice cream.

I think the most disappointing news, and one that is encouraging if you want to see some interest rate decline, was the Purchasing Manager’s Index, which is put out by the Institute for Supply Management. Their monthly data point fell below 50. Last month it had risen above 50 indicating some strength. This month, it fell below 50 again, and we saw some renewed weakness in the 112 rate of change. Again, it’s just one month. It had been good, now it’s bad. We’re getting a lot of volatility in these numbers, and the trends themselves are not compelling one way or other. They’re just not that compelling at the moment, so more of the same. We’re still looking at probably September by the time the Fed has enough data to either shut down any speculation or to start moving these interest rates.

I still think we’re going to see enough weakness, particularly with their PMI going down the latest month. If that holds for two consecutive months, that will be very interesting. Three consecutive months, it’ll be pretty much looking at probably a third quarter decline in interest rates at the end of the third quarter. We’ll see how the data continues to come in, but they’re not going up. Incomes are, retail sales are, manufacturing is not. By the way, we’re seeing the softness spread to the non-residential construction-side of the market, the parts that are not being funded by federal government. That’s starting to slow down. It’s like that hit a wall in the latest data, so be careful about that sector. It is beginning to look more like a traditional slowdown in that sector. Thanks for joining us for this edition of Fed Watch. I’ll see you next week.