Soft landing still a priority as ECB cuts rates and U.S. gears up for next FOMC meeting

ECB rate cut

The ECB cut rates by 25 basis points on Thursday from 3.50% to 3.25%. This was their third rate cut of 2024 and the first back-to-back rate cut in 13 years, dating back to December 2011. The decision came after a 1.80% uptick in inflation was published in September, under the 2.00% benchmark. However, while inflation has come down, data regarding business activity and general sentiment surveys have reported lower than expected in the past month as well. On Thursday, ECB President Christine Lagarde indicated that while the Central Bank is now comfortable with their inflation level, they are now focusing on a potential weakening consumer and constricting economy. As of last Friday, three more rate cuts were priced in through March of 2025.

U.S. retail sales

Last Thursday, the Census Bureau at the Department of Commerce published U.S. retail sales for September, beating expectations by 0.10%. Their advance estimates of U.S. retail and food services were $714.40 billion, a 0.40% increase from August. This monthly increase appears to be largely driven by an uptick in receipts at food services and drinking places, rising 1.00% in September after a 0.50% increase in August. When considering changes over the past quarter as well as the past year, retail sales have risen 2.30% and 1.70%, respectively. Economists tend to look to U.S. retail sales as a key indicator of household finances as it quantifies how much consumers are spending on discretionary items. In this lens, the September reading beating expectations can be seen as a demonstration of a strong consumer, despite recent labor market contractions.

Fedspeak and the broader economic outlook

U.S. retail sales were not the only indicator of a strong consumer. FOMC governors’ Fedspeak as well as Federal Reserve Bank data signaled strength amongst U.S. households. The Philadelphia Fed Manufacturing Data was published last Thursday, which measures business conditions in Philadelphia as a proxy for the broader U.S. The data is compiled from 250 manufacturers in the Philadelphia district, and a value above zero typically is a positive indicator, while below zero indicates that business conditions are worsening. The Index published at 10.30 last week, beating expectations of 4.20 as well as August’s posting of 1.70.

These indicators seem to align with an influx of Fedspeak that occurred over the past few weeks, with many governors emphasizing the strength of the economy while also proposing future rate cuts. Christopher Waller spoke at Stanford this past Monday, conveying his belief that the Fed should start to move away from restrictive monetary policy, mentioning that his “baseline still calls for reducing the policy rate gradually over the next year.” John Williams, President of the New York Fed, spoke similarly the week prior, stating, “I expect that it will be appropriate to continue the process of moving the stance of monetary policy to a more neutral setting over time.” The candidness of FOMC governors in speeches over the past week points towards another rate cut at the next Fed meeting on November 7, with 88.80% of the market pricing in a rate cut as of Friday morning.

The week ahead

This week includes the publication of existing home sales, services and manufacturing PMI, and new home sales on Wednesday and Thursday. The week will close out with durable goods orders and October consumer sentiment publishing on Friday.