This week brought another reset to market expectations on interest rates as Fed Chair Jerome Powell said at an event said that the FOMC’s confidence that inflation was “well on its way to the 2% target” had weakened with recent economic reports, including the March CPI reading, stronger retail sales, and the Beige Book. Shown below, expectations for a July rate cut fell hard this week (42% from 48.5%), which will dampen any recovery in home improvement and home related retail in the second half of 2024.
Source: CME FedWatch Tool
The Federal Reserve Beige Book for April 2024 was released this week. Of particular note, was the broadening of reports from Districts of improving trends in housing and auto (something that the Fed didn’t want to see). The anecdotes within the April report that caught are eye were:
- Several reports mentioned weakness in discretionary spending, as consumers' price sensitivity remained elevated. Auto spending was buoyed notably in some Districts by improved inventories and dealer incentives, but sales remained sluggish in other Districts. Tourism activity increased modestly, on average, but reports varied widely.
- Contacts in several Districts reported sharp increases in insurance rates, for both businesses and homeowners (something we’ve been writing about). Another frequent comment was that firms' ability to pass cost increases on to consumers had weakened considerably in recent months, resulting in smaller profit margins. (We’ll be watching retailer gross margin rates closely in the Q1 2024 reports coming next month.)
- Atlanta District tourism and hospitality contacts reported that strong spring break travel was in line with expectations. Appetites for cruising increased, with several Florida ports reporting strong passenger counts. Business travel continued to improve. Industry contacts remain optimistic about activity for the balance of the year.
- The San Francisco District indicated that consumers have become more price sensitive in recent weeks, particularly for groceries and fresh produce, as they favored discounted products and focused on necessities. (Recall our report on Amazon’s CEO’s comments that value and saving money remain the consumers’ focus.)
