September 17 – Good news is good news again on Wall Street today, with stocks reacting positively to this morning’s better than expected data releases, as the major indexes all remain in the green at mid-day while the VIX falls back below the 17 level. With the FOMC meeting kicking off today, the market is anxiously awaiting tomorrow afternoon’s announcement as the debate between a 25-or-50-basis point cut continues. The dollar has rebounded from this morning’s lows in response to the unexpected strength in retail sales, trading in the green near 100.6 at the time of writing. Treasuries are hanging slightly in the green as well, with 10-year yields trading at 3.64% and 2-year yields just below 3.61%. This morning’s signs of a stronger than expected U.S. economy are also relieving demand concerns to some extent, helping push crude oil higher as the nearby WTI contract rises back above $71. The ags saw some strength to start the morning but have since lost steam following an increase in estimated Russian wheat production by SovEcon and an increase in Brazilian soybean exports by Anec today.
U.S. industrial production came in much stronger than expected in August, rising 0.8% month-on-month versus analyst estimates of a modest 0.2% rise and rebounding sharply from July’s surprise 0.9% dip. This was the highest reading seen since May and continues to point to strength in the U.S. economy following this morning’s better than expected retail sales figures. In year-on-year terms, industrial production was flat, though with nine of the last 12 months showing year-on-year declines, this is still viewed positively. The manufacturing portion also outperformed expectations sharply, rising 0.9% month-on-month, rebounding from July’s -0.7% and marking the sharpest growth seen since February. Capacity utilization in August was pegged at 78.0%, rising from a downwardly revised 77.4% in July but still below market expectations, mostly due to a surprise 0.2% drop in operating rates in the utilities sector to only 70.5%.
Homebuilder sentiment has rebounded in the U.S., with the National Association of Homebuilders (NAHB) Housing Market Index rising to 41 in September from 39 in August, a slightly larger increase than analysts expected. Despite remaining in pessimistic territory (below 50), this broke a streak of four consecutive monthly declines. Sales expectations for the next six months led the push higher, rising 4 points to a reading of 53, meaning a majority of builders now feel confident about upcoming market conditions for the first time since May, as mortgage rates have fallen and are expected to continue their way down following anticipated rate cuts from the Fed. The present sales conditions portion of the index rose one point to 45, while the traffic of prospective buyers rose two points to 27. Regionally speaking, the Northeast saw the greatest strength at 55, followed by a tie between the Midwest and West at 42, and the South at 40. One other noteworthy takeaway from today’s release was seeing the share of builders cutting prices fall to 32%, the first drop seen since April. All of this points to a potential firming of already-high home prices, or at minimum support for current levels, and if we were to see front-loaded cuts from the FOMC, we could see a rush of demand drive prices to even higher record highs, risking the return of additional inflationary pressures.
So, does the market really need a 50-basis point cut? Obviously, that’s what Wall Street wants, but it’s difficult to look at current data and say the answer is yes at this time. Today’s readings are the final ones the FOMC will see before tomorrow’s decision is announced (excluding some housing data early tomorrow morning), and everything pointed to a healthier than expected U.S. economy. Yes, the labor market has begun to show signs of softening that some Fed members have expressed a desire to get ahead of, but it’s hard to find other data that points to a need for an immediate sharp cut, with the market already doing a fair amount of the Fed’s desired easing for it and aggressive cuts still carrying risks of increasing re-inflationary pressures. Nevertheless, Fed fund futures continue to point to a 50-basis point cut being favored over 25. Outside of that debate, look for traders to react to tomorrow’s dot plot graphic for shaping expectations in the year ahead.
