What rate cut would mean for consumer confidence
Consumer confidence remained high even after a dip this month, and a rate cut by the Federal Reserve could send it higher.
About 85% of those surveyed by WalletHub said they would be as confident (45%) or more confident (40%) in economic performance after a rate cut. More than half (57%) said the economy would get a boost from an easing, while 71% said it was the right move.
Despite those numbers, WalletHub CEO Odysseas Papadimitriou opposes a rate reduction.
“I don’t think a third Fed rate cut in just three months is a wise move.” The moves are “starting to appear more and more political because the fundamentals of the economy are still strong,” he said. “My worry is that we’re playing a card that could be worth a lot later on down the road at a time when it gets us very little. And there’s no getting it back.”
After the expected cut this week, the Fed probably will be data dependent, looking at “retail sales, consumer strength, and trade, to see whether it’s prudent to stop hiking and, in 2020, potentially get back into a position of raising rates,” according to Peter Cramer, senior portfolio manager at SLC Management.
The recent rate cuts “have re-steepened the long end of the curve, while [the Fed’s] purchase of Treasury bills has tightened the front end of the curve,” he said. “In short, the Fed has effectively pushed back concerns of a recession. I believe that Powell and the Board will be content, after a 25bps rate cut this month, to see how things progress through the end of the year.”
The Conference Board’s Consumer Confidence Index dipped to 125.9 in October from 126.3 in September. The Present Situation Index advanced to 172.3 from 170.6, while the Expectations Index fell to 94.9 from 96.8.
“Confidence levels remain high and there are no indications that consumers will curtail their holiday spending,” said Lynn Franco, Conference Board senior director of economic indicators.
“For the past three months, more than 24% of consumers have said they expect interest rates to be lower over the next 12 months,” she pointed out. “This is a significant increase from prior months and a clear indication that consumers are expecting further cuts. That said, the impact of another rate cut has already been factored into confidence and is likely to have little, if any impact, on overall confidence.”
More consumers said business conditions are “good” than in the previous month, while fewer said conditions are “bad.”
A growing number said jobs are “plentiful,” but the number saying jobs are “hard to get” also rose in October.
Fewer respondents expect conditions to improve in the next six months, while the number expecting conditions to worsen also fell.
Pending home sales
Pending home sales climbed 1.5% in September following a 1.4% rise in August. While the Midwest and South posted increases, activity dropped in the Northeast and West.
Though low mortgage rates have fueled the rise in pending home sales, lack of supply has hurt the market, said Lawrence Yun, NAR’s chief economist.
“Going forward, interest rates will surely not decline in a sizable way, so the changes in the median price will be the key to housing affordability,” Yun said. “But home prices are rising too fast because of insufficient inventory,” he said.
Separately, the S&P CoreLogic Case-Shiller U.S. National Home Price Index rose 3.2% (before seasonal adjustment) year-over-year in August up from 3.1% in the prior month. The 10-City composite index was up 1.5%, down from 1.6% the prior month, while the 20-City index grew 2.0% year-over-year in both months.
The Texas Service Sector Outlook Survey showed “robust” activity in October, “as revenue growth increased and labor market indicators strengthened,” said Christopher Slijk, Dallas Fed assistant economist. “Price pressures were mixed, with the selling price index turning negative for the first time since 2016, while wage pressures picked up. Firms perceived business conditions as improved compared to September, and retailers reported a net positive outlook for the first time this year.”
The Treasury Department said late Tuesday it expects to borrow $352 billion in the fourth quarter, ending with a $410 billion cash balance. In the first quarter of 2020, Treasury plans $389 billion of borrowing, ending the quarter with a $400 billion cash balance.
In the third quarter, Treasury borrowed $440 billion, and finished the period with a $382 billion cash balance, compared to expectations of $433 billion borrowing and a $350 billion balance.
Details will be announced Wednesday morning.