Fed’s Beige Book shows little evidence of Q2 pickup – RBC CM

Josh Nye, Economist at RBC Capital Markets, suggests that following an upbeat assessment in April, yesterday’s Beige Book disappointed.

Key Quotes

“Most districts characterized growth as modest; however, on the upside, contacts in several districts remained generally optimistic.

Beige Book indicated only modest improvement in economic activity over the reporting period. Most districts once again noted modest growth in consumer spending, and four reported mixed or flat activity. That characterization contrasts with April PCE report that showed a surge in consumer spending to start the second quarter. After the previous Beige Book showed demand for nonfinancial services picking up to a moderate pace, today’s report indicated only modest services growth in many districts.

Manufacturing activity was reportedly mixed, although some of the districts that saw declines also noted an improving outlook. Manufacturers in several districts once again noted weak demand from the energy sector, which itself “remained weak” over the reporting period. Both residential and commercial real estate activity continued to increase in most districts.

Employment growth was generally modest but tighter labour markets were “widely noted” in many districts. Wage growth was modest and concentrated in areas of labour market tightness, although some districts continued to note higher wages for lower-skilled positions. Price pressure reportedly grew slightly in most districts and the outlook for prices was described as moderate.

Our Take: The Fed has shifted its tone in recent weeks, leaving the door open to a rate hike as early as June if there is sufficient evidence of a Q2 rebound and further progress toward the Committee’s dual objectives. With Beige Book providing limited support on that front, the Fed will be looking for hard data to confirm a pickup in activity.

The June meeting is just two weeks away and we do not expect there will be enough evidence by then to convince a majority of FOMC voters to raise rates. As well, uncertainty surrounding the outcome of the Brexit vote (taking place in the following week) should tip the Committee toward staying the course. However, if evidence of a rebound in growth continues to accumulate, market expectations will likely further gravitate toward a July hike.”