Consumer Data Raises Fed Cut Expectations

Major US stock indices saw marginal gains on Tuesday, 24 September, driven by an unexpected drop in US consumer confidence. This led to a weaker US dollar (DX) due to higher expectations of more aggressive interest rate cuts by the Fed. In turn, the S&P 500 and Dow Jones (USA 30) extended their gains to fresh record highs after rising 0.25% and 0.20%, respectively, while the tech-heavy Nasdaq (NDAQ) increased by 0.56%.

Yet many Americans remain concerned about fewer job openings and working hours and slower wage growth despite the Federal Reserve cutting interest rates by 50 basis points last week to support the labour market and employment conditions. 

Combined with uncertainty from Donald Trump’s trade policies and political tensions around government funding, the drop in consumer confidence is expected tolead investors to react cautiously, with the potential for increased volatility. However, only time will tell what lies ahead.

Let’s dive deeper into the latest US economic updates:

Consumer Data Raises Rate Cut Speculation

According to the Conference Board, Consumer confidence fell sharply in September to 98.7 from 105.6 in August, a three-month low and the biggest drop since mid-2021 due to concerns about a weaker job market and high inflation.  The expectations index, which looks ahead six months, also slipped but remained above the key 80 level that historically signals recession. 

The pessimistic consumer report has led the market to start pricing in more aggressive rate cuts by the Fed through the end of the year and also next, with 75 basis points expected in 2024 and 175 to 200 points in 2025. This is despite Fed officials Neel Kashkari and Michelle Bowman pushing back recently on dovish expectations and forecasts of a healthy 3% growth in the third quarter.  Moreover, Bowman noted that while core inflation has come down since April, it remains well above the Fed's 2% target, and although economic growth moderated earlier this year, domestic demand remains solid.

However, many economists argue that a more aggressive rate cut could bolster consumer optimism and help the US economy avoid a hard landing as long as the shrinking labour market differential (the difference between plentiful vs. hard-to-get jobs) did not signal an unemployment rate rise from 4.2% to 5%. Still, the probability of a recession remains at 25% as consumer spending remains healthy for now, though policy-induced recession risks are also elevated. On the other hand, the index also showed expectations for inflation over the next 12 months rose from 5.0% to 5.2%, making the Fed’s policy recalibration much harder.

Trump Tariff Proposals Add to Market Jitters

Senate Republican Leader Mitch McConnell also took a cautious stance against the likely increases in costs for American consumers, criticising Donald Trump’s proposed tariffs after comments the former President would impose high tariffs on imports from countries like Mexico and China to promote domestic manufacturing. 

Trump said on Tuesday, 24 September, during a campaign speech in Georgia that he would “put a 100% tariff on every single car coming across the Mexican border" and vowed to offer tax incentives for companies to relocate to the US as both he and Kamala Harris step up their efforts to outline their visions.  Trump aims to dissuade companies like John Deere (DE), General Electric (GE) and IBM (IBM) from moving manufacturing operations outside the United States through punitive tariffs and slashing the corporate tax rate to 15%.

Mark Cuban, an investor who supports Democrats, also criticised Trump's proposals to place tariffs on American companies that manufacture abroad, warning that Trump's proposed tariffs could increase prices for Americans.  

Anna Rathbun, CIO at CBIZ Investment Advisory Services, also said that Trump’s tariffs would "make it more difficult for the Fed" to decide how to approach still-high inflation.

US Government Shutdown Averted Against Trump

Meanwhile, US congressional leaders have agreed to a short-term funding deal of $231 million to avoid a government shutdown at the end of September, decoupling from the Save Act legislation backed by Donald Trump, who had wanted to provoke a shutdown. 

The Republican House Speaker, Mike Johnson, had initially supported Trump's demand to tie government funding to the passage of the Save Act but later acknowledged that shutting down the government so close to the presidential election would be "political malpractice." 

Trump was hurt by the 35-day government shutdown in 2018 and 2019, but he now thinks Biden and Democrats would take the blame. Past shutdowns have had little impact on the stock market, though the lack of economic data during a shutdown could make the Federal Reserve's interest rate decisions more difficult. However, the impact would depend on the duration of a potential shutdown, as shutdowns reduce economic output, increase costs, and create unnecessary damage—case in point: the 2018-2019 shutdown, which saw economic output down by $11 billion, and the 2013 shutdown, which saw economic output down by $20 billion. Yet, historical performance does not guarantee future results. 

Outlook Depends on Election and Rate Cuts

While the future is yet to be determined, many economists expect weaker but not recessionary growth in the fourth quarter and into 2025 as firms control costs and consumers tighten spending. S&P Global Ratings expects the US economy to grow slower in 2024 and 2025, viewing the Fed’s interest rate cuts as gradual and delayed with a focus on the labour market. 

However, as the Fed is expected to still cut rates, some warn that the market rally could create bubble risks, and while the economy remains in good shape, stock valuations are extended. JPMorgan (JPM) analysts, in particular, believe that regardless of who wins the election in November, the amount of debt and deficit in the US will likely decline further, expecting short-term volatility and higher tax rates. 

Yet a 60% tariff like that proposed by Trump could harm the US economy more if he is elected, as it could pressure China to change its mercantilist trade practices in retaliation. Some economists estimated that the increased costs from Trump’s tariffs totalled $830 per year for the average American household, including critical wage and employment losses. Interestingly, the tariff threat is believed to be more political grandstanding than a substantive economic threat. 

Nonetheless, it is important to note that these are projections, and only time will tell what lies ahead.

Conclusion

Many traders are navigating a rather complex economic landscape, characterised by pessimistic consumer confidence data sending indices to fresh records while dealing with uncertainty stemming from Donald Trump's proposed traffic and a narrowly avoided government shutdown in the US.

As the Fed is expected to cut interest rates further this year and beyond, market response to the consumer data may be short-lived, given the risks it adds to economic growth and managing inflation. 

Meanwhile, while economic growth remains relatively optimistic with potential policy changes, analysts warn of extended stock valuations and short-term volatility ahead and past the US election. 

As such, investors may prefer to stay on the sidelines while keeping and eye on both the situation around politics and how the labour market progresses.