As yield curve inversion discussion continues, market turns focus to Fed

The debate over yield curve inversion continued, as a summer Friday yielded little economic data, but the market waits to parse the minutes of the most recent Federal Open Market Committee and then eyes will turn to the Federal Reserve Bank of Kansas City’s annual Jackson Hole retreat.

The Fed cut rates at its July 30-31 meeting, with two presidents dissenting, and the minutes, to be released Wednesday, may offer insight into the panel’s thinking and where the non-voting members stand. If that doesn’t satisfy curious minds, the Kansas City Fed’s symposium on Challenges for Monetary Policy, set for Aug. 22-24 in Jackson Hole, Wyoming, will offer a variety Fed members’ ideas, as most take the opportunity to speak.

Late Thursday, Federal Reserve Bank of St. Louis President James Bullard said there was no rush to cut rates, and certainly no reason for the Fed to move before its scheduled meeting: Sept. 17-18. In a televised interview, Bullard said he remained open-minded about the need for a rate cut next month, although he refused to “prejudge” the panel’s decision.

Bullard repeated his thoughts the yield curve inversion needs to be for an extended period before it’s a signal of a coming recession.

That sentiment was echoed by Scott Anderson, chief economist at Bank of the West. In a note, he wrote: “In reality, we will need to see a deeper and more prolonged 2-10-year spread inversion before it would be a truly reliable recession signal. In past cycles, the 2-10-year spread has inverted by an average of 40 basis points for 13 consecutive months before a recession has occurred. One day of inversion by two basis points doesn’t cut it.”

U.S.-China trade tensions and fears that the Fed is “behind the curve” have prompted perceptions of economic failures, he said. “Since economic policy errors are man-made, there is a chance that economic policies can be adjusted in the months ahead to head-off a worst-case scenario for 2020,” Anderson writes. “I am not optimistic that we will reach a comprehensive trade agreement with China before the U.S. election next year. Furthermore, the prospect of additional fiscal stimulus is equally unlikely. That leaves the Federal Reserve to shoulder the burden of sustaining this economic expansion for as long as they can.”

Consumer sentiment
The University of Michigan’s preliminary August consumer sentiment index dropped to 92.1 from 98.4 in July, its lowest level since it posted a 91.8 reading in January. Expectations fell to 82.3 from 90.5, while the current conditions dropped to 107.4 from 110.7.

The one-year inflation outlook ticked up to 2.7% from 2.6%, while the five-year inflation outlook held at 2.6%.

Housing
Housing starts dropped 4.0% in July to a 1.191 million seasonally adjusted annual rate, its third consecutive decline, while building permits soared 8.4% to 1.336 million, the Commerce Department reported Friday.

The gain in permits, a harbinger of future activity, was the largest since June 2017.

June’s starts data were revised down to a 1.241 million pace from the originally reported 1.253 million rate.

Economists polled by IFR Markets expected 1.259 million starts and 1.270 million permits.

Mortgage Bankers Association Chief Economist Mike Fratantoni noted starts were pulled down by a 17% decline in multifamily starts. But permits’ gain is an “indication of momentum.” Despite builders’ confidence, many construction jobs are unfilled and “the lack of skilled labor continues to be a constraint on the overall pace of building.”

Business Leaders Survey
Service sector expansion continued in the region, according to the Federal Reserve Bank of New York’s August 2019 Business Leaders Survey. The business activity index slipped to 9.1 from 9.6 in the prior month.

The business climate index dropped to 2.8 from 4.7, but the positive reading suggested “that, on balance, firms viewed the business climate as better than normal,” the Fed said.

The forward-looking indexes had activity at 25.0, down from 28.4, while the future business climate index dropped to negative 8.0, its third consecutive below-zero read, from negative 0.6.

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