Market Update
“Life is like a box of chocolates, you never know what you’re gonna get.” The wise advice from the 1994 blockbuster hit Forrest Gump has become a hallmark for accepting the unexpected. But maybe unbeknownst to Forrest, when you buy a box of chocolates today and flip over the cover, you receive a detailed list outlining exactly what you’re going to get.
Looking at last week’s Fed policy actions, the same is true for monetary policy these days, as markets were pricing in a ~ 97% probability of a 25-basis-point rate cut. That’s exactly what markets bit into last Wednesday, with the Fed Funds target range getting reduced to a range of 4.0% to 4.25%. Now that expectations for further policy easing have been firmly entrenched into market expectations, investors should be on the lookout for any surprises in the form of inflation or deterioration in growth.
This week will provide the next check on inflation with the PCE report. On the growth side, retail sales from this past week indicated consumers are still opening their wallets to spend, which was welcome news for markets. Below the surface, the trend in consumer spending has been driven more and more by high-income households (see the chart of the week below). With delinquencies in the subprime markets beginning to increase, focus will need to be placed on the lower-end consumer for signs of accelerating stress that may stall the so-far resilient U.S. economic growth.
High-Income Households Driving More U.S. Consumption
What Happened
U.S. Rates – As widely expected, the U.S. Federal Reserve cut interest rates by 25 basis points.
U.S. Retail Sales – Retail Sales Ex-Autos & Gas for August came in at 0.7% vs. estimates of 0.4%.
U.S. Import Prices – U.S. Import Prices Ex-Petroleum came in at 0.2% on a month-over-month basis vs. estimates of 0.1%.
