Below are the economic and market highlights for the week:
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Consumers bid summer a fond farewell with a burst in spending. Retail sales rose 0.6% in August, topping estimates for a 0.3% gain. August’s figures matched July’s upwardly revised 0.6% gain. Excluding autos, spending was up an even more robust 0.7%. Shoppers seemed undeterred by higher tariffs as online sales, clothing stores, and sporting goods rose 2.0%, 1.0%, and 0.8%, respectively. Aside from goods, bars and restaurants also saw receipts rise 0.7%.
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Tough times continued for the housing market in August as housing starts, a gauge of new residential construction, fell to 1.307 million from the upwardly revised 1.429 million in the prior month. Residential permits, another measure of trends in housing construction, tumbled to 1.312 million, from an upwardly revised 1.362 million in July. With the Fed cutting rates in the quarters ahead, homebuilding could be poised for a rebound as financing costs move lower.
Bulls Recharge as Rate Cuts are Back
Markets traded quietly during the early part of the week before popping higher on Thursday and Friday once the Federal Reserve announced it would renew its interest rate cutting campaign. The S&P 500 notched new all-time highs on Thursday and Friday, marking its sixth weekly gain over the last seven. Small cap peer, the Russell 2000 Index, also wrestled its way into the history books on Thursday, scoring its first all-time high since November 2021.
Investors had been waiting for rate cuts and got exactly what they had expected from the Fed on Wednesday. The Fed reduced its policy rate by a quarter point to a 4.0-4.25% range. The Fed also announced that they anticipated that an additional two cuts could be on the table by year end with another in 2026. While the economic data remains mixed as to whether or not a cut was necessary, the Fed opted to go ahead and do so preemptively. Preemptive cuts occurred in 1995, 1998 and 2019 and are intended to insure against a downturn prior to broader signs of distress. Powell himself described the Fed’s decision as an “insurance cut” or “risk-management cut” but looking forward the central bank will proceed meeting by meeting in assessing the speed and magnitude it would move to a neutral policy rate, which is expected to be in the 3% range when all is said and done. Markets were initially unsettled by the Fed’s rate cut projections, hoping for more, but ultimately warmed to the notion that rates are expected to be 0.75% lower over the next 6-9 months. This set off a rally for the remainder of the week.
Markets are in the mood to rise presently, despite the numerous and growing headwinds. We suspect the labor market is weaker than markets acknowledge. Spending, while strong, is very concentrated. According to a statistic by Moody’s, the highest earning 10% of Americans accounted for 49.2% of all spending in the second quarter–the largest portion since records began in 1989. Yes, the spending figure looked good on an aggregate basis, but the concentration of that spending at the higher income levels along with the concentration of investment returns within a narrow part of the market appears to be driving a positive wealth effect that is a major supporting factor for the economy. While all this works for you on the upside, it works the same way on the downside as well. Time will ultimately tell, but expectations are high and even if monetary policy is moving more and more accommodative, markets rarely move linearly and September and October are historically volatile. The old adage of “don’t fight the Fed” applies however, and provided the data doesn’t fall off a cliff, investors seem content to keep playing along.
The Week Ahead
Key reports include personal income and spending, durable goods orders, and existing home sales.