9/13/24: Inflation Data for August Signals Key Fed Rate Decision

The market received key inflation data this week that will help inform the Fed’s rate decision on Wednesday. The Consumer Price Index (CPI) for August came in mostly as expected, up 0.2% month-over-month and cooling to +2.5% year-over-year from +2.9% in the previous month’s report, largely due to a drop in gasoline prices. Core CPI came in slightly hotter than expected with a 0.3% gain on the month and +3.2% versus last year, with shelter costs continuing to fuel the gain along with services such as airfares, car insurance, and childcare. Notably, real average hourly earnings rose 1.3% year-over-year versus a 0.7% increase in July, providing a boost to consumers’ spending power. The Producer Price Index (PPI) also came in slightly higher than expected versus the prior month at +0.2%, but dropped to +1.7% year-over-year as expected.

This morning’s University of Michigan Sentiment Index came in at 69.0 for September, an improvement from 67.9 in August as more moderate inflation expectations and lower interest rates bring down borrowing costs for consumers. The 1-year inflation outlook eased to 2.7% from 2.8% in the previous report.

Rates are down this week as the bond market prices in nearly a 50% probability of the Fed cutting rates by 0.50% at their meeting on Wednesday, however a 0.25% rate cute remains the most likely scenario. Fed speakers have taken on a more dovish tone recently as the labor market has shown signs of weakening and inflation data has moderated. The 2-year US Treasury has dropped dramatically to 3.58% from over 4% in August, and the 10-year yield is 3.65% as of this writing.

Next Week:

Empire Manufacturing, Advance Retail Sales, Industrial Production, Housing Starts, FOMC Meeting, Philadelphia Fed Business Outlook, Leading Index (LEI), Existing Home Sales

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