Awaiting the Fed – The Daily Tearsheet

Vital Statistics:

Stocks are higher as we await the FOMC decision. Bonds and MBS are down small.

The FOMC decision is due at 2:00 pm today. The FOMC is not expected to make any changes to interest rates, however the market will be looking at two things: potential dissenters, and a signal that the Fed is throwing in the towel waiting for tariff-based inflation.

Christopher Waller and Michelle Bowman are potential dissenters who might advocate for a 25 basis point cut.

Second quarter GDP rose 3.0%, which was much higher than the 2.5% estimate. Lower imports and higher-than-expected consumption drove the increase. Q1 GDP was unchanged at -0.5%. Investment was a drag, which was primarily attributable to declining inventory investment. The drag in investment was probably tariff-related.

The PCE Price Index rose 2.1% on a seasonally-adjusted annual basis and 2.5% if you exclude food and energy.

At first glance, the report looks quite strong, however real final sales to domestic producers fell from an increase of 1.9% in Q1 to 1.2% in Q2. This number strips out a lot of the trade noise and indicates that consumption is moderating. I still think the tariff situation introduces enough uncertainty into the number that the Fed will be happy to have an excuse to sit on its hands going into September.

The private sector added 104,000 jobs in July, according to the ADP Employment Report. This was above the 74,000 street expectation and below the 110,000 estimate for Friday’s jobs report. Leisure and hospitality accounted for the biggest increase, while education / health services lost 38,000 (wondering if that is seasonality).

“Our hiring and pay data are broadly indicative of a healthy economy,” said Dr. Nela Richardson, chief economist, ADP. “Employers have grown more optimistic that consumers, the backbone of the economy, will remain resilient.”

Separately, the JOLTs report showed that there were 7.4 million job openings in June, which was a decrease from 7.7 million openings in May.

Mortgage applications decreased 3.8% last week as purchases fell 6% and refis fell 1%. “Mortgage applications fell to their lowest level since May, with both purchase and refinance activity declining over the week. There is still plenty of uncertainty surrounding the economy and job market, which is weighing on prospective homebuyers’ decisions,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The 30-year fixed rate was little changed at 6.83%, but high enough that there was not much interest in refinancing, pushing the refinance index lower for the third straight week. Purchase applications decreased by almost 6%, as applications for conventional, FHA, and VA purchase loans fell, despite slowing home-price growth and increasing levels of for-sale inventory in many regions.”

Consumer confidence improved in July, according to the Conference Board. “Consumer confidence has stabilized since May, rebounding from April’s plunge, but remains below last year’s heady levels,” said Stephanie Guichard, Senior Economist, Global Indicators at The Conference Board. “In July, pessimism about the future receded somewhat, leading to a slight improvement in overall confidence. All three components of the Expectation Index improved, with consumers feeling less pessimistic about future business conditions and employment, and more optimistic about future income. Meanwhile, consumers’ assessment of the present situation was little changed. They were a tad more positive about current business conditions in July than in June. However, their appraisal of current job availability weakened for the seventh consecutive month, reaching its lowest level since March 2021. Notably, 18.9% of consumers indicated that jobs were hard to get in July, up from 14.5% in January.”

Notwithstanding the data from ADP, the weakening of the job market is unappreciated aspect of the economy right now. While the unemployment numbers look good, they are being driven by people exiting the labor force, not by people getting jobs.