Gold surged to new highs for the week in U.S. trading, buoyed by a weaker dollar. More soft economic data precipitated further dimming of expectations for a September rate hike from the Fed. That caused U.S. yields to fall, dragging the dollar index to new 10-month lows.
Fed funds futures show that the probability for September rate hike has fallen to 8.2%. Goldman Sachs now thinks there is only a 5% chance.
The Fed is going to have to do some furious jawboning in the weeks ahead if they want a September hike at least back on the table. However, in doing that, it becomes increasingly apparent that they are ignoring the data that they have maintained they are dependent on. The Fed’s credibility is at risk.
U.S. consumer inflation slowed to 1.6% pace in June, versus 1.9% in May. Retail sales fell 0.2%, below expectations of +0.1%. Retail sales ex-auto was -0.2%, on expectations of +0.2%. The preliminary look at July consumer confidence was a
miss as well, falling to 93.1.
While industrial production was better than expected in June, the preponderance of the data were pretty weak. That led to some negative revisions to Q2 GDP forecasts. The Atlanta Fed’s GDPNow model new sees 2.4% growth. That indicator has nearly halved since the series began back in late-April. Goldman Sachs cut their prediction to 1.9%.
With inflation and growth expectations waning, it certainly appears as if the Fed is tightening into weakness once again. If they continue to do so, a recession is the likely result…or worse.
Another financial crisis, which according to Janet Yellen just two-weeks ago was not going to happen in our lifetime, suddenly can not be ruled out. “We can never be confident that there won’t be another financial crisis,” said Yellen on Thursday.
We know that historically the Fed cuts 300 bps during recessions. At this point, that would put us deep in negative territory. I would also hazard that if the economic weakness extends much deeper into Q3, that balance sheet normalization will fall off the table as well.