The probability of a rate cut this year has increased. Treasuries rallied strongly on Wednesday following soft data for industrial production and retail sales. The 3m/3m annualised rate for manufacturing output tumbled to -3.5% in April.
Manufacturing has raised many false alarms throughout this expansion. This latest downturn may be no different. The University of Michigan (UoM) Index of Consumer Sentiment surged in early May to its highest level in fifteen years, driven by a jump in the expectations index. The IBD/TIPP Economic Optimism Index also rose sharply this month.
Of course, it is tempting to dismiss this month’s jump in consumer sentiment. According to the University of Michigan, “The gains [in the expectations index] were recorded mostly before the trade negotiations with China collapsed and China responded with their own tariffs.”
Nevertheless, the shift to high value-added services is the reason that consumer confidence has been able to diverge from manufacturing production on a few occasions during this economic cycle. The move lower in Treasury yields will also provide further support for the housing market: the headline NAHB index increased again in May to a seven-month high.
Cheap but tight money is continuing to pay dividends. Lael Brainard’s support of this economic policy framework last week was welcome, as was the Fed Governor’s willingness to discuss yield curve control.
