Fed Watch – 7/19/2024

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

Hello, thank you for joining me for this edition of Fed Watch. Today is July 19th, 2024. There’s some interesting data that came out this week, like always in economics, it’s a little bit mixed, but I think it’s consistent with what our expectations are for going forward.

First piece of news that came out this week, the data was retail sales and the weakness we noted last month in the May data extended into the June data. In fact, it came, it became a little bit more pronounced in June. The three month moving total rising trend is below normal and really at best it’s indicative of a slowing rate of rise in retail sales, then that’s not really surprising, we’re barely running above year ago levels as it is, and it seems, the consumer is just being very cautious about what they’re buying. They’re not, unless you’re a 2% of the luxury goods, doing fine, but otherwise we’re just seeing a general slowdown in that part of the economy. The 1/12 rate of change is only at 0.2%. It’s in a full fledged phase C. So we expect at least the indications are a little bit more deceleration. 3/12 also moved into phase C it’s only at 2.4%. This is a nominal dollars. So after inflation, it’s, it’s actually negative and the violence there is minus 11, so it is phase C and the 12/12, it was at 3.1. So we have the 1/12 and the 3/12 running below the 12/12, the consumers just seems to be running out of gas as we speak.

You’re going to see that in I think summer months are going to be disappointing for retailers and inventories are going to need to be watched very carefully. We also saw weakness in the single family housing starts numbers that June month to month change was okay, but the quarter, the second quarter from the first quarter was, it was only positive, but which is good, but as well below normal, the 3/12 is in phase C also. So we’re on the backside of that cycle.

So we’ve got this lift in retail sales and we’ve got this lift in housing. And now it seems to be reverting back into sluggish trend as we go through the second half of the year. Really the month in, the quarter to quarter change was significantly below normal and that throws off all sorts of alarm bells. Only COVID cases in the great recession were really weaker seasonal rising trends where single family housing starts. And that has a ripple effect. I mean, Alan and I have been doing more and more research, getting ready for our July 25th webinar and housing is not a great leading indicator for many things, but it is worth looking at, and it is a bellwether for what to expect in the broader economy. And this is telling us that this slowdown is likely to become more pervasive. And that’s good news in terms of seeing, if you want interest rate decline, the Fed lowering interest rates, probably in the third quarter, that remains the most probable scenario.

The thing that disrupts that thinking a little bit is that, excuse me, US Industrial Production, pick up some steam in the June data. And it’s not just because last June was weak, we saw a real improvement. The 3/12 rate of change actually moved into phase B. It’s only at 0.6%. So we’re not setting the world to fire here but it did show some stability, some modest improvement. Keep an eye on that.

It suggests to us that we’re on track with thinking that this is going to be a softness in the economy, not rolling over into recession in the economy. We’re still not getting that out of the leading indicators. The only one that’s telling us that there’s going to be more broad base weakness than we are calling for is really the US Leading Indicator, broad data and 1/12 rate of change, that’s put out by the conference board. All the other leading indicators are telling us that this is just going to be that squishy softness that the Fed’s going to be able to respond to by lowering those interest rates. The prognosis is the same.

We get these interest rate declines, wait until late ’24 or later in the mid 2025. If you need to borrow money, you want to borrow money, strike then, that’ll be probably the best point in this cycle for these interest rates. And we continue to see inflation post 2025 that is going to give us higher and higher interest rates. So strike while the striking is good. Thanks for watching this edition of Fed Watch. There’s a lot of money to be made out there, a lot of wealth to be created. It’s just a different way to do it right now. Thank you very much.