June Leading Indicators, July Regional MF Surveys, UI Claims, FOMC

Indicators Point to Positive H2

  • The Conference Board’s Leading Economic Index for June increased by 0.6 percent.
  • Initial Claims for Unemployment Insurance fell by 15,000 for the week ending July 15, to hit 233,000.

The Conference Board’s Leading Economic Index increased by 0.6 percent in June, its 10th consecutive monthly increase, and the strongest monthly gain since January. Building permits was the strongest contributor to the LEI in June. Both the Coincident Index and the Lagging Index were up by 0.2 percent for the month. The solid increase across all three indexes for the month of June is a positive signal for the U.S. economy, reinforcing our expectations for moderate GDP growth through the second half of this year. The first estimate of second quarter GDP will be released on July 28.

The good LEI report for June should reassure the Federal Reserve as it begins a historic policy rotation toward balance sheet reduction this fall. We expect the Fed to leave the fed funds rate range unchanged at 1.00-1.25 percent at the conclusion of the upcoming Federal Open Market Committee meeting over July 25/26. They will likely reinforce expectations that the schedule for the beginning of balance sheet reduction will be announced at the conclusion of the September 19/20 FOMC meeting. Market expectations for future interest rate hikes over 2018 have cooled a bit with weaker inflation readings. It will be interesting to see if the Fed changes the language in their upcoming policy announcement to reflect a downshift in rate hike expectations. However, we look for the Fed to leave 2018 interest rate expectations unchanged next week, instead opting for maximum maneuvering room later this year. They are caught between lower than expected inflation now and the potential for more inflation later as the U.S. economy begins to run above the potential GDP trend line for the first time in this expansion cycle.

The European Central Bank today issued a policy announcement that implied that they are considering how and when to end their asset purchase program. The ECB left their ultra-low benchmark interest rates unchanged, but indicated that asset purchases will “run until the end of December 2017, or beyond.”

Labor market indicators remain positive. Initial claims for unemployment insurance decreased by 15,000 for the week ending July 15, to hit 233,000, a very low number. There may be some residual seasonality imbedded in the midsummer numbers due to the annual auto plant summer closures. Continuing claims increased by 28,000 for the week ending July 8, to hit 1,977,000, another very low number.

The Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook Survey’s current conditions index dipped to a still-positive 19.5, suggesting that manufacturing conditions in the mid-Atlantic area are still improving, but at a slower pace than last month. The New York Fed’s Empire State Manufacturing Survey was released on Monday. Its current condition index also eased, to a still-positive 9.8.

Market Reaction: Equity markets are mixed. The 10-Year Treasury bond yield eased to 2.24 percent. NYMEX crude oil is down to $46.89/barrel. Natural gas futures are up to $3.06/mmbtu.

For a PDF version of this Comerica Economic Alert click here:  Leading_Indicators_07202017.

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