Brighter Prospects for Fed Rate Cuts

The likelihood of Federal Reserve rate cuts late this year became brighter after the August retail data showed weaker consumer demands thus easing inflationary pressures.  Traders at the U.S. short term rates futures showed considerable interest on this development.

Shifting Futures Market Bias

The futures markets have showed considerable fickle mindedness. Bias has shifted between maintaining high interest rates from the Federal Reserve and clamor for subsequent interest rate cut.  The attitude was induced by troubles in the financial market which still continue without let up.  

After the consumer spending report has been released, the prospects for Fed rate cuts by year-end went up to a new high cycle registering at 36 percent.  Thursday saw the figures at 28 percent only showing an attitude shift favoring further interest rate cut.

Surprisingly, the traders at the futures market bet on an 88 percent chance that the Federal Reserve will keep the benchmark interest rates steady at 2 percent on its regular policy meeting set on Tuesday.

Lower than Expected Retail Sales Record

A 0.3 percent decline of retail sales was recorded in August defying positive expectations of economists that a 0.2 percent increase would be more likely.  General sales dropped by 0.7 percent but this figure does not include sales from the automobile sector.  Revisions on the data have been made on July retail sales figures as it went down by 0.5 percent from the original pegged result of 0.1 percent.

Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut said that the weakness was generally a broad based phenomenon.  Ruskin added that the data showed considerable weakness in the retail industry contrasting expected positive gains that were projected by leading economists. The downward revisions of July data highlighted the overall decline of consumer spending.

Sales index excluding records from automobile, gasoline and building materials spending has been closely watched as it registered a 0.2 percent drop in August following a 0.4 percent increase in July.

Impact of Tax Rebates Slowly Diminishing

Ian Shepherdson, the chief U.S. economist at High Frequency Economics in Valhalla, New York said that tax rebates and consumer incentives have been waning pretty fast.  The diminishing impact of tax rebates is reflected on weakening retail sales records.  On the other hand, the producer price index suffered a major decline in August dropping by 0.9 percent, the biggest so far since October 2006.

As expected, core consumer prices that exclude energy prices and food rose by 0.2 percent.  The annual price comparison of core prices, which recorded a 3.6 percent increase, was the biggest since May 1991.

Ruskin added that lower commodities will certainly take some time in providing valuable relief for the average consumer.