Fed Watch – 6/28/2024

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

Hello, thank you for joining us for the June 28th, 2024 edition of FedWatch. The numbers that came out this past week were good if you’re inclined to wanting to see some interest rate decline, and I think most people do, because there are some additional softness in the economy showing up primarily. I don’t expect the Fed is going to do anything before September, but they’ve surprised us before, but at least it put September more squarely on the map. I think it’s a potential time forcing Fed decline, and the softness also means that we could be seeing some mortgage interest rate decline and other interest rates going down. It’s not just about the Federal Reserve interest rates.

Money supply has stayed very tight still through the main data, so the Fed always has that angle going for them. Money supply is now the lowest it’s been in four years, so that’s significant. They’re continuing to squeeze there, so that gives them some latitude to lower rates if they are so inclined.

The news for new home sales in May was not good. We saw the 1/12 rate of change fall to minus 16.4, and it’s not because last May was exceptional. It was just a bad month for new home sales. The 3/12 rate of change is in phase D at minus 3.2 percent, and the 12/12 rate of change has peaked, so we get cyclical descent now confirmed going on for new home sales. It’s consistent with our forecast, which is good for ITR, but it’s not good for people in that industry, obviously, but it does support 10 weakening in the economy that would allow for some interest rate relief later on this year.

Following up on that, building permits, new single family building permits in May were also weak, so new home sales were weak, and we saw the permitting trend really weakening up. The month-to-month change was negative at minus 0.21 percent, but while normal, when I look back in the data, it may be normal, but it indicates weakness in the marketplace there is what it boils down to. The 1/12 declined to just 1.2 percent, which is not good, and you couple that with the new home sales, and it’s all of a sudden that sector is looking less positive going forward through the summer months, and that’ll get the Fed’s attention.

Real personal income was up in May. That disposable personal income is after-tax income, but it was up only 1.1 percent, and granted, that’s better than last month’s 0.9 percent, but at 1.1 percent, we’re running way below the post-Great Recession, pre-COVID average of 2.4 percent, so this is really meager income growth going on after taxes. It is adjusted for inflation, so there is some positive growth going on, but it’s not what is typically indicative of a healthy environment.

In picking up on that, we looked at the personal consumption expenditure price data that came out, and that was also encouraging if you want to see some interest rate decline, because the headline inflation dropped to 2.6 percent, it said drop it edged down from 2.7 percent last month to 2.6 percent this month, but it’s in the range that you’d expect. The trend is still easing rate of inflation, and the core inflation, so you back out food and energy, that core inflation rate came down to 2.6 percent, and that was 2.8 percent last month, and that also is in the trend that we would hope to see to get some inflation cooling.

It’s interesting. If you looked at energy and services combined, the rate of inflation is 4.8 percent, so we’re getting some pressure still from the service side of things. The services alone were up 3.0 percent year-over-year, whereas if you look at hard goods, durable and non-durable goods combined, that was actually down 0.1 percent year-over-year, so the pressure remains in the service side and in the energy side, and you couple that with really minimal growth in after-tax income, and you’re setting the stage for some weakness in the second half of this year in the economy.

In line with our forecast, and I think if you’re rooting for interest rate decline, those are good signs from that perspective. If you’re rooting for a very strong economy, then these aren’t good leading indicators that we just discussed. I hope you all have a great 4th of July, and we’ll see you next week.