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All right, let's take a look at retail sales coming out this morning, flat for the month of June and May retail sales revised upwards to 3/10 of a percent, that was up from the initial report of a 10th of a percent. Now signaling that the consumer is at least stronger than what Wall Street had feared. So here to discuss, we want to bring in Robert Zakin, he's City's senior global economist. It's great to have you here, Robert. So I guess when you take a look at this report, how do you think Fed officials are looking at this? Once they go through the tea leaves here, are they at least comforted in the fact that maybe the consumer is holding up stronger than initially feared at this point?

Morning, thanks so much for having me. I think that is the key question. I think for the Fed, what this will show is that the consumer is holding up well and is not falling off a cliff as some analysts had feared. You know, the economy was very strong in the second half of last year and the big debate in the first half of 2024 was, were we seeing a sharp slowdown in the economy or a moderation into more modest sustainable growth. And I think what this report shows is that the consumer is holding in there well and maybe is not spending at the heady pace that we saw in the second half of last year, but is certainly not falling off a cliff. And I think for the Fed, this will take some urgency off of easing rates out of fears that the economy may be slowing down more sharply. So I think they're going to still signal at the July meeting that September cut is very likely, given progress on inflation, but the economy continues to hold up well, they can afford to be patient and probably move relatively gradually with rate cuts after September.

But it sounds like they don't need to wait for inflation or at least their core kind of tracking of inflation, whether that be via CPI or PCE to get down to 2%, as that would perhaps mean that they stayed too tight for too long.

Yeah, absolutely. And I think you've heard that from the Fed as well, that they feel that they've seen enough progress on inflation to get ready to start easing policy. I think in the first part of this year, you had several months of much stronger than expected inflation and that really pushed out the idea of rate cuts. Now you've had several months of pretty good inflation and yes, on an annual basis, um, by the Fed's preferred measure, we're not back to target, but I don't think that's a precondition for them to start easing, that they think that they've seen enough progress that inflation's moving sustainably back to target and they're ready to start easing up on that very restrictive policy. So I think that's probably what we're going to hear from them when they when they meet this month.

Robert, are you confident, I guess, that the US economy is going to be able to avoid a recession? And and if so, then what does that mean for Fed rate cuts, the number of times we could see rate cuts happen here before the end of the year?

Yeah, and absolutely, this is still the key debate. You know, our US team here at City still expects the US to go into recession this year. And so, in their base case, that leads to a lot more urgency from the Fed and after the first rate cut in September, they have them easing at every meeting after that, going into next year as well. Now, you know, as I mentioned, it looks like to me from these data, the economy has moderated, um, but is is holding up well. And so far, any of the indicators that are pointing to a heightened risk of recession are still fairly modest at this stage. You know, consumer spending has slowed somewhat, the labor market has loosened somewhat, but overall, the numbers are still holding up quite well. So I think there's still recession risk out there, but to me, the data are feeling more like that soft landing. And as noted, in that soft landing scenario, the Fed still cuts in September in my view, but probably only cuts two times this year and maybe a few times next year. So I think they're going to ease, but probably at a more gradual pace than if the economy goes into recession, in which case, um, they'll start easing much more rapidly.

Robert, if we do see the Fed ease at a more gradual pace, I guess my question to you is, then what does that signal? Or does that complicate the easing path or the path forward here for central banks around the world and how so?

Yeah, and I I think this is the key debate within global macro, what it means for the global economy. We've seen many central banks around the world start to ease ahead of the Fed. This is fairly unusual. We saw the ECB cut in June. We've seen the Bank of Canada cut, a variety of other developed market central banks. Of course, several emerging markets have started easing a fair amount before that. Um, you know, so in this cycle, clearly there's a lot of domestic factors that are driving what these central banks are doing. You know, a lot of this inflation that we're seeing in all these economies is driven by service sectors, which are more domestically oriented. Um, that being said, we still think that central banks have shown a preference for moving together when they can. And if the Fed stays higher for longer, there's only so much I think that many of these central banks are willing to deviate from Fed policy. So in our base case where the Fed starts easing fairly consistently after September, that makes the lives of other central bankers much easier. They can start easing fairly consistently in tandem with the Fed. If the Fed is higher for longer, I still think you'll see rate cuts from these other central banks, but they're going to move more gradually as well out of fear of deviating too much from the Fed. So what the Fed does here is very important for the US, but also very important for global monetary conditions.

All right, Robert Zakin, City senior global economist. Thanks.

Thank you.