Economy holding up on eve of rate cut

The Fed is almost certain to cut interest rates at the FOMC meeting later this month, despite some better news on the real economy. Payroll employment growth was much stronger than expected in June, the resurgence in underlying retail sales suggests that second-quarter consumption growth was as strong as 4.0% annualised, and the stock market is setting new record highs. Nevertheless, economic growth still slowed in the second quarter, and we expect a further slowdown in the second half of the year. The deteriorating survey evidence, the continued downturn in global manufacturing and the risk that trade talks with China ultimately break down will weigh on economic growth, while core inflation looks set to remain subdued. We think that will convince the Fed to follow a likely 25bp rate cut this month with an additional 50bp of loosening by early next year. But with the economy holding up in the near-term, a second rate cut may not come before the December meeting.