The Zhitong Finance App learned that a series of reports released this week showed that the US economy started slowly in the second quarter, further proving that demand is cooling down, which will help lay the foundation for the Federal Reserve to cut interest rates.

Data released on Thursday showed that both new home construction and manufacturing in the US fell short of expectations. Furthermore, there were previous reports that retail sales declined sharply, and potential inflation fell for the first time in six months. These data all contributed to a sharp rise in US stocks.

Although Federal Reserve officials said in speeches on various occasions on Thursday that interest rates should remain high for a longer period of time. But investors are betting that this week's data indicates that the economy is entering a deceleration phase, which may give policymakers the confidence they need to reduce borrowing costs.

According to CME's FedWatch tool, the market anticipates that interest rate cuts may occur as early as September of this year, with a probability of 50.5%. The second rate cut will be in December, with a probability of 37.5%.

BMO Capital Markets senior economist Sal Guatieri said in a report: “The US economic data has been falling short of expectations recently, which indicates that the economy is losing momentum in the face of restrictive monetary policies. But how fast inflation will recede to provide some interest rate relief is still uncertain.”

Recent trends in the real estate market have shown signs of weakening, with builders breaking ground for fewer homes than expected, and construction permits falling. U.S. factory activity remains sluggish as the Federal Reserve's industrial production report shows a decline in factory output.

Retail sales stagnated after the previous two months of healthy growth, indicating that high borrowing costs and tight budgets may be encouraging consumers to cut back on discretionary spending, according to a report released on Wednesday.

Americans may also be cutting back on spending as the job market showed signs of weakness in April after a strong start to 2024. Data released earlier this month showed that employers added 175,000 jobs, the lowest level in six months, while the unemployment rate rose slightly to 3.9%. Hourly wage growth has also slowed.

After the release of housing starts and industrial production data on Thursday, the Atlanta Federal Reserve's GDPNow model lowered expectations for economic growth in the second quarter. Meanwhile, the Dow Jones Industrial Average broke through the 40,000 mark for the first time, and a day ago, the S&P 500 index hit a record high for the 23rd time since 2024.

housing market

New housing starts slower than expected, and the number of building permits has declined, indicating that recent increases in mortgage interest rates have put builders on hold in evaluating demand prospects. Another data for this week showed that industry sentiment also declined somewhat as mortgage interest rates remained above 7%.

After showing an upward trend at the end of last year, single-family housing construction permits have been declining for three consecutive months, falling to the lowest level since August last year. This may limit the development of future housing construction.

Stephen Stanley, chief US economist at Santander US Capital Markets LLC, said in a report: “Builders may be a bit concerned about whether demand will free them from inventory, so they are moderately slowing down the pace of new production.”

Manufacturing issues

As optimism about manufacturing growth waned at the beginning of the year, industrial production stagnated in April, suppressed by a decline in factory output.

In the face of rising input prices and unstable demand, it is difficult for the manufacturing industry, which accounts for three-quarters of the total industrial output, to establish growth momentum. The American Institute for Supply Management (ISM)'s latest manufacturing activity index re-entered a contraction range in April, after a month of expansion for the first time since 2022.

Consumers are cautious

The retail sales report released on Wednesday showed a decline in 7 out of 13 categories. Most of the expenses are on necessities such as food and gasoline, rather than non-essential items.

These sales figures show that already strong consumer demand is weakening, and this demand has been supporting the economy. While the labor market provides the capital needed to spend, rising prices and interest rates could further strain household finances.

According to data released by the New York Federal Reserve on Tuesday, US household debt hit a record high in the first quarter, and the proportion of consumers who find it difficult to repay their debts rose. As budgets shrink, Americans are becoming less optimistic.

Consumer confidence measured by the University of Michigan fell to a six-month low due to concerns about employment and borrowing costs. The report released last week also showed that purchasing conditions for bulky goods fell to a one-year low.

Inflation is cooling

An important consumer price report released on Wednesday showed that core inflation has cooled for the first time in six months. The consumer price index, which excludes food and energy, rose 0.3%, breaking the trend where data was higher than expected for the third time in a row.

In response, Federal Reserve officials said they would like to see more such data to gain the confidence they need to start considering cutting interest rates. Chairman Powell said on Tuesday that the Federal Reserve “needs to be patient to make restrictive policies work.”

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