8/16/24: Inflation Data Supports Fed Rate Cut in September

Inflation data this week should provide more support for the Federal Reserve to cut rates at the September meeting. In July, the Consumer Price Index (CPI) rose 0.2% month-over-month and 2.9% year-over-year, down from 3.0% in June and lower than expected. The Core CPI, which excludes volatile food and energy components, was up 0.2% month-over-month and 3.2% year-over-year in July, down from 3.3% in June. Prices at the producer level also provided a boost to rate cut expectations. Headline producer prices edged up just 0.1% month-over-month in July, while the year-over-year rate slowed to 2.2% from 2.7% in June. Services prices declined across categories, slowing from an annual 3.5% to 2.6% for the lowest rate of inflation since early this year, and goods prices remain subdued. PPI excluding food and energy was unchanged for the month while the annual rate slowed to 2.4% from 3.0%.

The July Retail Sales report demonstrated consumer resiliency despite a cooling labor market, higher interest rates, and tapped out savings. In a broad-based rebound from last month, July Retail Sales grew more than expected at 1.0% month-over-month and 2.7% year-over-year, exceeding consensus expectations. Auto sales bounced back sharply after a cyberattack on dealerships caused a sizable decline in June. Electronics and appliances also posted solid gains, and E-commerce sales remained a significant 17% of the total, assisted by Amazon Prime Day.   Control-group sales, which are used to calculate gross domestic product, rose 0.3% in July, down from June’s 0.9% increase.   Anecdotally, Walmart raised sales guidance for the year, indicating shoppers are becoming more selective on discretionary purchases and focusing more on essentials. The University of Michigan Consumer Sentiment Index exceeded consensus expectations, climbing to 67.8 in August’s preliminary survey from 66.4 in July. The rise was driven by the expectations component, while the current conditions gauge slipped. Inflation expectations remain anchored with 1-year expectations at 2.9% and 5-10 year expected inflation at 3.0%, unchanged from the last survey. Although the consumer has been resilient, declining savings rates, rising credit card debt, and delinquencies pose risks to the sustainability of consumer spending.

Market volatility continued this week, as bonds and equities rebounded from the recent sharp reaction to the weak labor report and turmoil in Japanese markets. The 2-year US Treasury rose to a yield of 4.10% and the 10-year stabilized at 3.92%, with the yield curve inversion at about 18 basis points (as of this morning). Next week, investors will pay close attention to the Jackson Hole Economic Policy Symposium, where Fed Chair Powell and other global central bank officials will likely provide insights into future monetary policy.

Next Week:

Leading Index, Chicago Fed National Activity Index, MBA Mortgage Applications, FOMC Minutes, Philadelphia Fed Non-Manufacturing Activity, Jobless Claims, S&P Global US Manufacturing PMI, S&P Global US Services PMI, Existing Home Sales, Kansas City Fed Manufacturing Activity, Kansas City Fed Manufacturing Activity, New Home Sales, Jackson Hole Economic Policy Symposium, BLS Preliminary Annual Payroll Benchmark Revision, Bloomberg August US Economic Survey

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