The domestic economy remains strong and there is no leverage problem in the household sector. Today’s savings ratio (8.1%) and the upward trend of recent years stands in marked contrast to the declines witnessed prior to the last two economic downturns.
The Fed may still decide to cut rates next month as the yield curve is demanding: the stock market could rally from here. Nevertheless, the U6 jobless rate is almost certain to hit new lows in the coming months. The yield curve may prove to be a very poor recession indicator.
The 3m/3m annualised rate for core retail sales (ex-autos & gas) jumped to 8.45% last month – the second highest reading in this record economic expansion. The 36.9% surge in refinancing activity last week will provide a further boost to consumption.
Research undertaken at Federal Reserve Banks suggests that inflation may be starting to rise too. The firmer CPI prints in the US were largely overlooked last week. A breakout in inflation would leave the Treasury market exposed.
With a potential margin squeeze unfolding (according to the BEA), companies could be tempted to push prices higher. Stronger prints for inflation could present a dilemma for the Fed.
