Downshifting US Inflation Will Help Reassure The Fed.

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Amara

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Jul 18, 2024
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Amid fresh signs that inflation is abating and economic activity is simmering down, the pathway to a Federal Reserve interest-rate cut is becoming clearer. The upcoming week will bring crucial reports on inflation, personal spending, incomes, and second-quarter GDP, all of which will help shape the Fed's decisions.

Key Points:
Core PCE Inflation: The personal consumption expenditures (PCE) price index minus food and energy is expected to have risen by 0.1% in June, marking a second consecutive month of such an increase. This would bring the three-month annualized core inflation down to its slowest pace this year, below the Fed's 2% target.

Economic Activity: The second-quarter gross domestic product (GDP) is forecasted to grow at a 1.9% annualized rate, following a 1.4% pace in the first quarter. This marks the slowest consecutive quarters of economic activity in two years, giving the Fed policymakers scope to begin easing, particularly with moderating job and wage growth.

Interest Rates: The Federal Reserve's next meeting on July 30-31 is unlikely to result in a rate cut. However, investors see a quarter-point reduction as a virtual certainty at their September meeting. Bloomberg Economics suggests the June PCE inflation data will likely be consistent with the Fed's 2% target for the third consecutive print, setting the stage for a September rate cut.

Housing Market: Reports on June sales of new and previously owned homes are expected. Economists project a moderate increase in new-home purchases and a fourth-straight decline in contract closings on existing properties. The "lock-in effect," where homeowners are reluctant to give up low mortgage rates, has restrained the resale market but favored builders who are offering incentives to boost demand.

Durable Goods Orders: The government's report on June orders of durable goods is forecasted to show tepid bookings for business equipment due to high borrowing costs restraining investment.

Global Context:
Bank of Canada: A slim majority of economists expect a second consecutive rate cut on Wednesday, with traders seeing a more than 90% chance of a cut after June's inflation report showed a headline figure of 2.7%.

Group of 20 Meetings: Finance ministers and central bank chiefs will gather in Brazil for two days of meetings. Key economic indicators will also be released across regions, including purchasing manager surveys from Japan to the UK.

Asia: China’s central bank is expected to keep lending rates steady despite weak second-quarter growth data. Other key data includes industrial profits and inflation figures from various Asian countries, with Japan’s inflation possibly prompting a rate hike consideration by the Bank of Japan.

Europe: The European Central Bank (ECB) begins an eight-week summer break after their recent meeting. Upcoming data includes Euro-zone consumer confidence and purchasing manager indexes. ECB officials have hinted at a cautious approach to changing borrowing costs.

Africa: Ghana’s finance minister will present the mid-year budget with expected upward revisions in economic growth. South Africa’s June inflation is forecast to slow marginally to 5.1%.

Latin America: Inflation data from Mexico and Brazil will be key ahead of upcoming rate decisions. Brazil's central bank paused its easing cycle in June, with no clear indication of resuming. The G-20 meetings in Rio de Janeiro will also include discussions on a global tax on billionaires.

Bloomberg Economics anticipates that with the labor market cooling, personal income growth slowing, and consumers becoming more discerning in their spending habits, conditions are set for a rate cut by the Federal Reserve in September.