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Something for your Espresso: 50bp from the ECB as Powell’s favourite gauge allows for Fed dovishness?

The ECB is expected to be the most dovish central bank in the G3 space, but there is also light at the end of the tunnel for those hoping to see a comeback of strong returns in USD fixed income.
2024-10-24

Good morning from CPH

The latest Beige Book reveals some intriguing trends that diverge from the recent, out of the ordinary growth trends we’ve seen this month—particularly in terms of employment and consumer spending.

On the employment side, the Beige Book reports only a slight increase in employment across most districts. Hiring appears to be driven primarily by the need to replace workers, rather than to fuel business expansion. This stands in sharp contrast to the robust jobs report released earlier this month, which showed a much stronger increase in employment. Many Districts, including Boston and New York, noted a slow pace of hiring, while worker availability had improved, which seems to be easing wage pressures. The Beige Book paints a picture of a labor market that, while still growing, is losing momentum compared to the stronger data seen in prior months.         

When it comes to consumer spending, the Beige Book paints a picture of a more cautious consumer base. Spending is mixed, with a noticeable shift towards cheaper alternatives, indicating that households may be tightening their belts. For example, in Districts like Philadelphia and Cleveland, businesses are reporting that customers are more price-sensitive, increasingly opting for less expensive goods. This marks a shift from the strong retail sales figures we saw just last week, which suggested that consumer spending was still resilient. Some Districts, like Atlanta and New York, even noted a softening in demand for higher-end goods, like luxury cars and discretionary items, which hints at a potential spending slowdown.

It also appears that consumer behavior is shifting towards increased price sensitivity. The Beige Book highlighted that rising input costs—particularly in areas like insurance and healthcare—are outpacing selling prices, leading to compressed profit margins for businesses.

It’s important to remember that the Beige Book is one of Federal Reserve Chair Jerome Powell’s key indicators for assessing the state of the economy. In fact, Powell referenced the previous edition of the Beige Book as one of the crucial reports guiding the FOMC’s decision to implement a 50 basis point rate cut earlier this year. Although the current report shows some improvement over the last edition, the overall message is clear: economic growth remains soft, and consumer spending trends are weakening, despite certain stronger headline data points elsewhere.

This softer outlook could ease market concerns about the Fed pausing rate cuts. With most Districts reporting modest price increases, tempered wage pressures, and limited hiring activity, the likelihood of continued rate cuts appears well-supported. While some traders have been betting on a potential pause in cuts, the Beige Book suggests that slowing economic activity might still encourage the Fed to maintain its accommodative stance moving forward.

Chart 1.a: Beige Book Echoes Recent Trends in Chicago Carts vs Retail Sales

The ECB is expected to be the most dovish central bank in the G3 space, but there is also light at the end of the tunnel for those hoping to see a comeback of strong returns in USD fixed income.

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