It's Fed Day: Here's Your Complete Guide
Here's your roadmap for the day, and also some notes on retail sales, AI, and more.
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Welcome to this week's edition of "the event you've all been waiting for."
This time, however, the event really is one that all traders and investors, even those less prone to the prompts of a sensationalist financial media, have been looking forward to. This time, what is published and what is said, will have a profound impact, not just on what track the high-speed, keyword reading algorithms that control short-term price discovery take, but on the flow of capital over the balance of the calendar year and perhaps well beyond.
Today is FOMC Wednesday. The Federal Reserve Bank's Federal Open Market Committee will release its policy statement at 2 p.m. ET, as it does eight times a year. The committee includes the entire board of governors and the presidents of the 12 regional district branches. All of the governors and five of the district presidents have voting rights. Among the regional presidents, New York has permanent voting rights, and the other four slots rotate annually. Just an FYI, Cleveland Fed Pres. Beth Hammack, who took that job in August, will vote for the first time at this meeting. Cleveland has 2024 voting rights, but former Pres. Loretta Mester retired in June. Chicago (Goolsbee) voted in Cleveland's place as an alternate in July.
The FOMC will also release its quarterly economic projections at 2 p.m. ET. The entire committee participates in this activity, which will show group median expectations as well as central tendencies and ranges for gross domestic product, unemployment, personal consumption expenditures, core PCE and the Fed Funds Rate for year's end this year, next year, the year after that and over the "longer run." This is where the infamous dot plot is found. In my opinion, the FOMC should probably stop releasing the results of this survey as it often makes the group look foolish and shows just how difficult predicting economic conditions over specified timelines really is.
Finally, a half hour after these two releases, at 2:30 p.m. ET, Fed Chair Jerome Powell will hold a live press conference where he will speak, and then field questions from members of the financial media. This may be the most important event of the three. The language of the statement is very important as well as that is where the groundwork for forward looking optionality is laid. Powell, however, can move markets simply through his demeanor and in the way he responds to what can be absurd questioning from certain members of the media.
Personal opinion? Mike McKee at Bloomberg News and Edward Lawrence of Fox Business tend to ask intelligent questions. Many others appear to be more interested in either asking political questions that the Fed has nothing to do with or seem to be trying to ingratiate themselves with the Fed Chair.
The Lay of the Land
FOMC Statement...
On July 31, the FOMC acknowledged that "the unemployment rate has moved up but remains low" and that inflation "remains somewhat elevated." The statement called attention to the fact that the Fed would likely now be "attentive to the risks to both sides of its dual mandate." What that did was open up the possibility at this meeting, to cut short-term interest rates in response to softening labor market data, despite stubborn consumer-level inflation that has not yet slowed to the Fed's stated 2% target.
Adding something descriptive to the committee's perception of weaker labor markets would be seen by traders as dovish. A pure cut-and-paste job or the removal of that nod to both sides of the dual mandate would be hawkish. Currently, Fed Funds futures markets trading in Chicago are pricing in a 63% probability for a half-percentage point reduction this afternoon to be made to the target range for the Fed's benchmark rate. These markets see a 37% likelihood for a quarter-percentage point cut.
FOMC Economic Projections...
As of June 12, the FOMC, at the median, saw a year end Fed Funds Rate of 5.1%, which if accurate, would imply just a quarter-point worth of rate cuts over the final three policy meetings of 2024. Fed Funds futures are currently pricing in a 56% probability for 1.25-percentage-points worth of cuts by year's end. Obviously, either the FOMC will seriously adjust that median or futures traders are way off.
At that time, the FOMC, at the median, saw year-end unemployment at 4.0%. Unemployment has already exceeded that level. The committee also saw inflation at 2.6% and core inflation at 2.8%. July PCE inflation printed at 2.5% at the headline and 2.6% at the core. According to the most recent data, the Fed has outperformed its own recent projections on slowing down inflation, while underperforming on unemployment. This too opens the door to an increased focus on labor markets and perhaps more aggression at the start of an easing monetary cycle.
Press Conference...
This is where we think we get, if not insight into the committee's group thoughts, at least some insight into the Fed Chair's thinking on where the economy is, where policy is and where both are going. Much will be made, at least in the questions asked on the Fed's ability to guide the economy toward a "soft landing" or "goldilocks" environment vs. a "hard landing" or recessionary environment as interest rates are suppressed at the short end of the curve.
The Fed chair will also likely be asked about the future of the central bank's "quantitative tightening" program. This program, due to an oversized monetary base, continues albeit at a somewhat slower pace to draw potential liquidity out of the system, which is a form of tightening, as the FOMC moves to loosen interest rate policy. Yes, those two policy regimes will work against each other and an astute member of the financial press will pursue this line of questioning.
Party Time
The Atlanta Fed tweaked its model for third GDP significantly to the upside on Tuesday. Within Atlanta's GDPNow model for the third quarter, the inputs for real personal consumption expenditures, real gross private investment, and real net exports were all increased in response to the Census Bureau's report on August retail sales as well as recent releases by the Bureau of the Fiscal Service and the Bureau of Labor Statistics. This took the real-time model for Q3 GDP up to growth of 3.0% from quarter-over-quarter, seasonally adjusted annual rate growth of 2.5%. The model will be "tweaked" again later this morning in response to August housing starts.
Retail Sales
August retail sales were not that great in my opinion. They did beat expectations, at least at the headline level. What got the Atlanta Fed excited was that headline print for August retail sales that showed month-over-month growth of 0.1% vs. projections for -0.2%. Making the surprise growth even stronger, July retail sales were revised to month-over-month growth of 1.1% from 1.0%.
Core sales, however, were not nearly as impressive. At the core, August retail sales increased 0.1% month-over-month, falling short of expectations for growth of 0.2%, while July (+0.4%) was left unrevised. For August, sales of furniture, electronics & appliances, food & beverages, gasoline, and clothing all suffered sharp month-over- month declines. The growth was in non-store (e-commerce) retailing and what is termed as "miscellaneous" store retailing, which includes things like convenience and dollar type stores.
The fun index, which is my term for sporting goods, hobbies, music and books as this is mostly discretionary and mostly focused on personal interests, did show a m/m increase of 0.3%. I guess that's a positive but must be taken with the fact that this "fun index" printed at -0.9% for July, which is the peak season for sporting goods and books. The fun index is down 3.6% year over year. In fact, on a year-over-year basis, August retail sales slowed from growth of 2.9% to 2.1%, while core sales slowed from 3.1% to 2.3%. So, save me your parties and your assessment in the media that retail sales "remain" strong.
It must be remembered, and the media has been painfully quiet on this (not to mention politically compromised economists), that GDP results are not considered valid unless in line with gross domestic income results for the same period ... and GDI has not been running at the same level as GDP for about a year and a half now. From the media on this... crickets.
On That Note...
August Industrial Production was much stronger than expected. The headline print landed at growth of 0.8% month over month vs. expectations for 0.2% growth. Keep in mind that this was up from a July print that was down 0.9% from June. The new strength was experienced in both manufacturing production and mining production as the utilities did not play along. Again. Capacity Utilization did return to 78% which was a positive surprise.
AI News
On Tuesday afternoon, BlackRock BLK announced a plan to form the "Global AI Infrastructure Investment Partnership" in what will be one of the largest investment vehicles ever created on Wall Street through Global Infrastructure Partners. Microsoft MSFT is a general partner in the fund, and Nvidia NVDA will provide the expertise. The group will seek $30 billion worth of private equity over time, which is intended to mobilize as much as $100 billion in total investment including debt financing.
More AI News
Salesforce CRM announced from its Dreamforce 2024 event in San Francisco, new collaborations with Alphabet's GOOGL Google Cloud and Nvidia. The intent will be to advance the abilities of Agentforce, which is what Salesforce calls its AI agents. These AI agents will be able to operate across both the Salesforce 360 and Google Workspace apps. Salesforce is also working with Nvidia's AI platform to accelerate computing in order to maximize the predictive and self-generative capabilities of AI workflows.
Economics (All Times Eastern)
07:00 a.m. - MBA 30 Year Mortgage Rate (Weekly): Last 6.29%.
07:00 - MBA Mortgage Applications (Weekly): Last 1.4% w/w.
08:30 - Housing Starts (Aug): Expecting 1.28M, Last 1.238M SAAR.
08:30 - Building Permits (Aug): Expecting 1.41M, Last 1.406M SAAR.
10:30 - Oil Inventories (Weekly): Last +833K.
10:30 - Gasoline Stocks (Weekly): Last +2.311M.
4:00 p.m. - Net Long-Term TIC Flows (July): Last $96.1B.
The Fed (All Times Eastern)
2:00 - FOMC Policy Decision.
2:00 - FOMC Economic Projections.
2:30 - FOMC Press Conference.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: GIS (1.06)
After the Close: SCS (0.37)
At the time of publication, Guilfoyle was long MSFT, NVDA equity.
