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Is The Economy Headed Toward a Slowdown?

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Markets yesterday closed in the green, with the Nasdaq accumulating gains as the day went one while the Dow basically halved its market open level. But we’re up again in this morning’s pre-market, on basically the same data we had a day ago: the Mexican tariff threat is off the table, while economic reads are apparently softening after weeks and months of clear strength.

Even with the prospect of Mexican tariffs hitting the market, such as what we saw last week, positive sentiment ruled: a 5% tax on Mexican imports would likely have stifled goods production domestically, which would likely have forced the Fed’s hand in cutting interest rates from their current 2.5%. This looked very attractive to traders, even as the rate remained beneath the Fed’s long-term neutral setting of around 3%. But cheap money is cheap money!

There have been other signs that the robust economy is coming under pressure in recent weeks and months, including lower reads in Durable Goods, Capital Spending (following Q1 GDP north of 3% largely on business investment), Retail Earnings, Freight Shipments and Jobs Numbers. Are these enough on their own — without the threat of new tariffs bumping up the price of goods — to convince the Fed to set a new downward trend in interest rates? So far, analysts don’t think so.

A new read on the Producer Price Index (PPI) for May showed further signs of slight weakness, though overall results were in-line with expectations: +0.1% on headline PPI was as predicted, as was the +0.2% print subtracting food and energy costs. Monthly trade doubled expectations to +0.4%, while Final Demand was lower at +1.8%, and down from the previous read’s +2.2%.

Analysts — and Fed voting parties — tend to wait for the other shoe to drop, meaning Consumer Price Index (CPI) figures, which are due tomorrow morning. But from the producer side, we still see slightly incremental inflation, like we’ve seen month over month for the past few years, more or less. Thus, no clear reason to raise interest rates to counter rampant inflation.

Then again, we still don’t see much impetus for the Fed to take down interest rates based on any of these new economic data points. So why are market futures still looking so strong? Because when headlines aren’t too hot and aren’t too cold, we have a term for that: Goldilocks.