Economics Weekly August 5, 2024
September Fed Funds Rate cut ‘on the table’
As was widely expected, the Federal Reserve left the Funds Rate unchanged at 5.25%-5.5%. At the subsequent press conference, Fed Chair Jay Powell gave a strong hint that a rate cut might be close, telling journalists that subject to the strength of upcoming data “I think a rate cut could be on the table at the September meeting”. Separately, the Bank of England became the latest major central bank to cut its policy interest rate, with a 25 bps reduction to 5.0%. This follows cuts by the Bank of Canada, the European Central Bank and the Swiss National Bank. We are now moving into a new global cycle for interest rates, where the trend is downwards. While one should not expect an immediate response from real estate cap rates, however, over the medium to long-run it would be surprising if they did not at track this trend.
Data on the U.S. labor market pointed to continued deceleration. The latest figures showed non-farm payrolls increased by just 114,000 jobs in July, down from 179,000 in June and well below expectations. The underlying data showed robust growth for the healthcare sector, with net growth of 55,000 roles, but the Information sector saw job losses, with a net decline of 20,000. Payrolls were virtually unchanged for the oil and gas, manufacturing, financial and professional sectors. Also, the unemployment rate increased from 4.1% in June to 4.3% in July, which was the fourth consecutive monthly increase. Wall Street had been forecasting no change. While a deceleration for the labor market risks slowing the economy, there is an element of “the bad news is the good news” here, as it also increases the likelihood of a reduction in the Fed Funds Rate.
This week sees data released on U.S. trade and consumer credit. Trade has for some time been dampened by inflation and high interest rates, although we believe the retreat for inflation lately improves the chances of stronger exports in the June figures. High interest rates lead us to forecast a decline for consumer credit. Also, two Fed rate setters will give speeches this week, which should give some clues on their thinking on the future direction for interest rates.
Things to watch for this week
Tuesday, August 6
U.S. Trade Deficit, June
Previous: $75.1bn
Forecast: $72.7bn
The trade deficit widened in May due to weaker exports. With inflation easing around the world, we suspect exports may have started to increase again, which should narrow the deficit slightly.
Wednesday, August 7
Consumer Credit Change, June
Previous: $11.4bn
Forecast: $10.2bn
Growth in consumer credit was strong in May, driven by greater use of payment cards. Given that interest rates remain high, we believe growth probably eased in June.