LIVE MARKETS-Feed your Fed: Powel & Co remain on rate cut path despite generally upbeat data

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FEED YOUR FED: POWELL & CO REMAIN ON RATE CUT PATH DESPITE GENERALLY UPBEAT DATA

Just as it convenes for its two-day policy meeting, the data-sensitive Fed was provided a heaping plate of mostly upbeat economic indicators. Even so, financial markets are fairly certain the meeting will culminate in the central bank cutting its key interest rate for the first time this year.

They're banking on a 96% likelihood of a one notch cut in fact, according to CME's FedWatch tool.

Receipts at U.S. retailers USRSL=ECI jumped by 0.6% in August, breezing past the 0.2% increase analysts were expecting and repeating July's upwardly revised reading.

"Consumer spending is booming and regardless of the negative jobs revisions, the U.S. economy is continuing to expand," writes Chris Zaccarelli, chief investment officer at Northlight Asset Management. "Uncertainty (and tariffs) have been the theme of the year, but the resilience of the economy, combined with interest rate cuts, are going to keep this bull market running."

Digging below the headline, the biggest attention-grabber on the upside is the 2.0% increase in non-store retailers, the segment which includes online shopping.

Sales at gasoline stations increased 0.5%, while spending on food/drink services, viewed as a gauge of consumer confidence, increased 0.7%. Clothing/accessories enjoyed a 1.0% bump, perhaps benefiting from the back-to-school season.

On the downside, the department store segment and miscellaneous retailers dropped 0.8% and 1.1%, respectively.

The "control" figure, which excludes autos, gasoline, building supplies and food services - and is most closely correlated with the personal expenditures element of GDP - rose by 0.7%, handily beating the 0.4% consensus.

Next, industrial output USIP=ECI eked out a 0.1% increase last month, according to the Federal Reserve.

While that's better than the 0.1% decrease economists predicted, it follows July's 0.4% drop, downwardly revised from the previously stated 0.1% drop.

Manufacturing output rebounded from July's -0.1% reading by rising 0.2%. Estimates called for a 0.2% dip.

Line-by-line, a 2.6% surge in motor vehicles/parts was countered by a 2.0% drop in utilities output during a month marked by a record-setting heatwave that affected much of the country.

Excluding autos, industrial output was unchanged. High-tech production inched 0.1% lower.

"We think the risks are skewed towards stagnation," writes Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics. "Tariffs have raised input costs for exporters, undermining the competitiveness of U.S. goods in global markets," Tombs says, adding that the unclear legality of current tariffs and the labor cost impediment to reshoring production suggest "industrial production (will be) broadly unchanged, net, over the next six months."

Capacity utilization USCAPU=ECI, a measure of economic slack, held firm at 77.4%, as expected.

The cost of goods imported to the United States (excluding tariffs) USIMP=ECI unexpectedly gained some heat last month, rising 0.3% in defiance of the -0.1% consensus, per Labor Department data.

Drilling down, a 2.1% drop in food/feed/drink and a 0.2% dip in petroleum helped keep the headline in check. Capital goods rose by 0.5%, while the price of imported consumer goods, excluding autos, heated up by 0.7%.

Import prices were unchanged compared with August 2024.

While that's well south of Powell & Co.'s 2% annual inflation target, import/export prices differ from other major inflation indicators with things like currency exchange rates and foreign demand thrown into the mix.

Here's a chart that shows annual import/export price growth against the dollar index, which tracks the greenback against a basket of world currencies.

In housing market news, the mood among homebuilders remains stuck in the basement this month.

The National Association of Homebuilders' USNAHB=ECI housing market index (HMI) held firm at 32, a lackluster bounce from June's reading, wallowing at multi-year lows.

An NAHB number south of 50 indicates pessimism in the sector.

Be that as it may, future sales expectations hit a six-month high.

"NAHB expects the Fed to cut the federal funds rate at their meeting this week, which will help lower interest rates for builder and developer loans,” writes Robert Dietz, NAHB's chief economist. “Moreover, the 30-year fixed rate mortgage average is down 23 basis points over the past four weeks to 6.35%, per Freddie Mac. This is the lowest level since mid-October of last year and a positive sign for future housing demand."

On Wednesday, economists predict a 0.6% increase in August building permits, which would support NAHB's brightened outlook.

And finally, in more ancient history, business inventories USBINV=ECI increased by 0.2% in July, as expected.

As a reminder, weak private inventories detracted 3.3 percentage points from second-quarter GDP, according to the Commerce Department.

(Stephen Culp)

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