Typically, the last week of August is something of a let-down.
It’s just ahead of Labor Day. Market activity tends to slow way down because so many on Wall Street are headed to the beach or the mountains.
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But the economic reports keep on coming, and the week ahead will offer food for thought on top of Federal Reserve Chairman Jerome Powell’s speech last week that signaled the Federal Reserve may cut its federal funds rate at its Sept. 16-17 meeting.
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The financial markets see it coming. Stocks soared in response to Powell’s speech. The CME FedWatch Tool puts the odds of a rate cut to 4% to 4.25% at about 85%. It has been higher, and other market measures puts the odds close to 100%.
Ian Shepherdson of Pantheon Economics believes Powell’s speech practically guarantees a rate cut in September “and more likely to follow.”
How: One phrase: “The baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.” That is, to move rates lower. And, maybe, more quickly.
A softening labor market
The reason: continued job weakness in the next few months as more evidence emerges on what rising tariffs are doing to the economy.
A second reason: The Trump Administration is on a quest to find a new Fed chairman who will support lower interest rates more aggressively than Powell has been in the last few years.
(The unspoken theme is that Trump’s Administration is seeking more direct control of the levers of the economy than any administration in years.)
The federal funds rate now is 4.25% to 4.5%. It is the rate the Fed wants member banks to charge each other for overnight loans. It sounds esoteric, but it is the starting point for all short-term U.S. loans.
Mortgage rates are more dependent on changes in the U.S. 10-year Treasury yield.
Freddie Mac, the big supplier of capital to the housing market said the 30-year mortgage rate late last week was 6.58%, down from 7% or so on January 16.
Two reports this week will likely cinch the deal:
- The weekly report on initial jobless claims, due Thursday morning from the Bureau of Labor Statistics.
- The Commerce Department’s Personal Consumption Expenditure Index (PCE) for July on Friday. This report is the Fed’s preferred measure of consumer inflation.
In the meantime, stock futures trading suggests U.S. markets will open modestly lower on Monday after Friday’s huge gains.
The Dow Jones Industrial Average jumped 846 points on Friday to 45,632 in its fourth-largest point gain of the year. The iShares U.S. Home Construction exchange-traded fund ITB jumped 5.6% in reaction to Powell’s Jackson Hole, Wyo., speech.
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The first is, admittedly, a very rough estimate of what’s happening in the job market. But it has to show increasing numbers of workers filing for unemployment compensation. It’s been slowly ticking higher for the last few weeks, and the Fed, not to mention the Trump Administration, will be watching the report carefully. That data will feed into the BLS’ big report, the August jobs report, due on Sept. 5.
The latter has to show that inflation is stable or coming down a bit, giving the Fed room to make the cut that many people want. In June, the index was up 2.6% from a year earlier and 2.8% once food and energy costs were stripped out.
Other reports will likely confirm the idea the U.S. economy is slowing.
New-home sales in July
Due Monday from the Commerce Department, it may show a small increase in July in the neighborhood of 625,000 to 630,000 units (annualized) in July thanks to three factors:
- Mortgage rates are slightly lower.
- Builders are interested in selling houses now, and big builders, especially, give buyers a break on mortgages for one to three years.
- Builders are constructing smaller dwelling units.
But new-home sales have yet to recover from the debacle of the subprime mortgage crisis.
More Economic Analysis:
- White House taps more potential candidates to head the Federal Reserve
- Producer price inflation shocks Fed interest rate cut bets
- White House taps more potential candidates to head the Fed
Durable goods orders for July
Due Tuesday from the Commerce Department report. The report focuses on new orders for long-lasting manufactured goods placed with domestic US manufacturers. June’s report showed a 9.3% decline.
Pending home sales for July.
Due Thursday from the National Association Realtors. The report is a snapshot of contracts signed to buy homes in the next two months. The index fell 0.8% in June.
Keep an eye on . . .
The first revision to the second-quarter estimate of Gross Domestic Product. The first estimate, released on July 30, showed economic growth increasing at an annualized 3% rate.
Two reports on Consumer Confidence. First from the Conference Board on Tuesday and then the Michigan Consumer Sentiment Index, from the University of Michigan on Friday. These reports have big swings because each focuses on attitudes and confidence.
Fed speak. Dallas Federal Reserve Bank President Laurie Logan and John William, president of the New York Fed both speak on Monday.
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