The financial market unrest that began following the most recent escalation in U.S.-China trade tensions continues. Our call remains that the FOMC will cut rates a further 25 basis points this year. The most recent escalation and subsequent market moves led us to think the next cut will happen sooner, in September, and to see a higher probability of a third cut by the end of this year. The market continues to expect much more easing than is in our baseline. In their initial comments on recent developments, policymakers have been cautious, signaling openness to ease to sustain the expansion while emphasizing that their focus concerning such developments is to assess the implications for the outlook and then adjust their policy views accordingly.
Brainard (8/5) said “I am certainly monitoring developments very closely…We’re committed to sustaining the expansion and I’m certainly monitoring developments for their implications for the outlook and I’ll continue to be very attentive to them.” George (8/5) seemed to prefer to wait for more conclusive evidence: “markets move quickly. It takes some time to see how that evolves and so the best I think that you can do right now is just to monitor and see how that unfolds.” Daly (8/6) said the trade headwind “is amplified” and “we’re in a picked-up position.” She noted the possibility that slower global growth could keep the neutral rate suppressed and justify more easing. Evans (8/7) warned that “There is a role for risk management,” and “inflation alone” would merit additional easing. He also said: “As long as inflation continues to behave the way that it has, I think we have the capacity to pursue these accommodative stances.” Bullard (8/6) warned that the Fed is not equipped to react to trade tensions with high frequency and that the FOMC has already “done a lot” to support growth. He further noted that current monetary policy is “considerably more accommodative today than it was as of late last year.” He said he is maintaining his projection of two 25-basis-point cuts this year.
|Source||Current||One Week Ago|
|Atlanta Fed GDPNow||1.9%||1.9%|
|New York Fed Staff Nowcast||1.6%||1.6%|
The headline composite for the ISM non-manufacturing survey fell further in July. There’s been a substantial if uneven, decline in the composite from an expansion high reached last fall. While all of the main components have contributed to that decline, the business activity and new orders measures have contributed the most over that period, and that was the case in July as well. Producer prices were soft in July. The core index excluding food and energy edged down a tenth, compared to the consensus expectation of a slight increase, and that resulted in the year-ago measure declining two tenths to 2.1%.
|Release||Period||Actual||Consensus||Revision to Previous Release||Previously Released Figure|
|ISM Non-Manufacturing Index||Jul||53.7||55.5||—||55.1|
|Wholesale Inventories MoM||Jun F||0.0%||0.2%||—||0.2%|
|PPI Final Demand MoM||Jul||0.2%||0.2%||—||0.1%|
|PPI Final Demand YoY||Jul||1.7%||1.7%||—||1.7%|
|Core PPI MoM||Jul||-0.1%||0.1%||—||0.3%|
|Core PPI YoY||Jul||2.1%||2.3%||—||2.3%|