Forward-looking · Money Fund Weekly | Strong consumer demand, retail data exceeds expectations, will the US economy ultimately achieve a 'no landing'?

Issue 202439

Last week's U.S. retail data exceeded expectations, leading to a moderation in market expectations for rate cuts. Currently, the probability of a 25 basis point rate cut in November stands at 90.9%.

Last Thursday, the U.S. Census Bureau reported that U.S. retail sales rose 0.4% month-on-month in September, exceeding the expected 0.3% and up from the previous 0.1%. Some analysts noted that this retail data followed stronger-than-expected CPI and non-farm payroll reports, further reinforcing the view that "the economy is far from entering a recession." Market expectations for a Fed rate cut subsequently moderated. After the data release, swap contracts showed traders reduced their bets on rate cuts in November and December by about 42 basis points.

According to CME FedWatch, the probability of a 25 basis point rate cut in November is currently 90.9%.

This Thursday, the Fed will release its highly anticipated Beige Book. Additionally, several Fed officials, including Logan, Smith, and Bowman, are scheduled to speak, which could increase market volatility. Analysts believe that while the first phase of rate cuts this year seems more certain, the second phase will be more cautious. With the U.S. election entering its decisive stage, any remarks from Fed officials warrant close attention.

On the central bank front, the European Central Bank (ECB) announced its latest interest rate decision last Thursday, cutting rates by 25 basis points as expected, lowering the deposit facility rate from 3.5% to 3.25%, marking the third rate cut in this easing cycle. The main refinancing rate was also reduced from 3.65% to 3.4%, and the marginal lending rate from 3.9% to 3.65%, both in line with market expectations. Notably, the ECB adjusted its language on inflation in its statement, now expecting inflation to return to 2% next year, compared to its previous forecast of reaching 2% in the second half of 2025. Following the rate cut decision, traders maintained stable bets on further ECB cuts, expecting a 25 basis point reduction in December and around 122 basis points by June next year, implying a 25 basis point cut at each meeting until then.

✧ Fed Moves & Data Releases

October 18, 2024

Fed's Bostic: No Rush to Cut Rates to Neutral

Fed's Bostic stated there is no urgency to lower rates to the so-called neutral level; the neutral policy rate is in the range of 3% to 3.5%; patience will be maintained; inflation is expected to reach 2% by the end of 2025; the labor market is strong, and inflation has declined significantly; the inflation fight is not yet over, and vigilance is needed; due to election uncertainty, there may be temporary slowdowns in investment activity and household spending.

October 17, 2024

Strong Consumer Demand Drives U.S. September Retail Sales Up 0.4%, Beating Expectations

The U.S. Census Bureau reported that U.S. retail sales rose 0.4% month-on-month in September, exceeding the expected 0.3% and up from the previous 0.1%. Year-on-year growth slowed to 1.7%, the lowest since January. Excluding autos and gasoline, retail sales grew 0.7%, surpassing the expected 0.3% and significantly higher than August's 0.2%.

U.S. Initial Jobless Claims at 241,000 Last Week, Hurricane Impact to Persist for Weeks

The U.S. Labor Department reported that initial jobless claims for the week ending October 12 were 241,000, down 19,000 from the previous week, below the expected 258,000 and the prior 258,000. Before seasonal adjustment, initial claims were 224,000, a sharp increase from the previous week.

October 16, 2024

Fed's Bostic: Another 25 Basis Point Rate Cut Expected This Year

Fed's Bostic said the U.S. economy is performing quite well; he is fairly confident inflation will return to the 2% target; he does not foresee a recession; expects inflation to be volatile and employment to remain strong; he (dot plot) anticipates another 25 basis point rate cut this year, on top of September's 50 basis point reduction; he will keep all options open.

October 15, 2024

Fed's Daly: One or Two More Rate Cuts Possible This Year

Fed's Daly stated the labor market is no longer a primary source of inflation; if inflation weakens as the Fed expects, one or two more rate cuts this year would be reasonable; open to just one more cut this year; in uncertain times, gradual policy adjustments are wise; all future adjustments will be data-dependent; 3% might be a good guess for the neutral rate.

Fed's Waller: Future Rate Cuts Need More Caution

Fed's Waller said the Fed should be more cautious about rate cuts than at the September meeting; his baseline expectation is a gradual reduction in policy rates over the next year; if the economy develops as expected, policy can adjust to a neutral stance at a "steady pace"; hurricanes and strikes could reduce October employment by 100,000; rate cuts could be accelerated or paused as needed.

October 14, 2024

Fed's Kashkari: Further Rate Cuts Appropriate in Coming Quarters

Fed's Kashkari said the U.S. economy is in the final stages of returning inflation to 2%; monetary policy remains restrictive; recent jobs data show the labor market is not weakening rapidly; future policy path will be data-driven; further rate cuts in coming quarters are appropriate; neutral rates may now be higher than pre-pandemic levels; global shocks are gradually fading.

✧ Other Central Bank Moves

October 18, 2024

ECB's Makhlouf: No Need for Faster Rate Cuts

ECB's Makhlouf said he does not believe the ECB should cut rates faster; geopolitics are more dangerous in some ways than ever; geopolitical impacts are beyond the ECB's control.

ECB's Villeroy: Future Rate Cuts Must Be "Flexible and Pragmatic"

ECB's Villeroy said the ECB should achieve its 2% inflation target earlier than expected in 2025; the ECB has "full optionality" at upcoming meetings; risks of persistently missing the target are now as significant as exceeding it; slowing private investment and consumption, along with rising savings rates, justify the latest rate cut; future cuts must be guided by "flexibility and pragmatism."

BOJ's Ueda: Closely Monitoring Financial Markets and U.S. Economy

BOJ's Ueda said the Japanese economy is recovering moderately despite some signs of weakness; it is expected to continue growing above potential; vigilance is needed on market and forex volatility and their impact on Japan's economy and prices; overseas economic prospects, including the U.S., remain uncertain, and financial markets are still unstable; the BOJ will carefully assess their impact on the economic outlook.

ECB's Vasle: More Confident Inflation Will Decline

ECB's Vasle said the ECB will decide on rates at each meeting; expects inflation to accelerate in late 2024; forecasts inflation will return to target in 2025; is now more confident inflation will decline.

ECB's Müller: Inflation to Stabilize Around 2%

ECB's Müller said growth will be more moderate; recent economic outlook has not changed drastically; risks remain in services and wages; inflation will stabilize around 2%.

October 17, 2024

ECB's Lagarde: Inflation to Fall to Target Next Year

ECB's Lagarde said the ECB has not pre-committed to any rate path; the end of restrictive measures will come in due time but has not arrived yet; downside risks to inflation outweigh upside risks, with inflation expected to reach target next year; growth risks are tilted downward, but a soft landing is still possible; surveys show slowing employment growth.

ECB Cuts Rates by 25 Basis Points Again, as Expected

The ECB lowered the deposit facility rate from 3.5% to 3.25%, in line with expectations. The main refinancing rate and marginal lending rate were also adjusted to 3.4% and 3.65%, respectively. The ECB reiterated it has not pre-committed to a specific rate path and will remain data-dependent; the disinflation process is progressing well, with inflation expected to reach 2% in 2025.

October 16, 2024

BOJ's Adachi: Rate Hikes to Be Very Gradual

BOJ's Adachi said conditions for normalizing monetary policy are in place; the BOJ will hike rates very gradually and maintain loose financial conditions until inflation sustainably stabilizes at 2%; no preset level for the natural rate; no specific month for the next hike; premature hikes must be avoided to prevent a return to deflation.

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