Worries about the U.S. labor market were soothed by falling weekly jobless claims and the aggregate corporate earnings picture remains robust, with annual profit growth for the S&P500 close to 14% through the second quarter with the reporting season now winding down.
What the wave of jobs anxiety and market turbulence has embedded however is bigger bets on Fed easing – with futures still priced halfway between a quarter- and a half-point cut next month and seeing 102 basis points of easing to year-end.
Whether the Fed has the confidence to go that far will hinge in part on inflation readings like those due this week.
Unusually, the producer price inflation report on Tuesday precedes the CPI update. The former should remain soft, with headline annual PPI expected to have run as low as 2.3% in July.
Monthly CPI readings of 0.2% should prove relatively benign for the Fed too, with “core” annual consumer price inflation forecast to have ebbed slightly to 3.2%.
In other words, there should be nothing to scare the horses if the number comes in on consensus – with even Fed hawks now acknowledging it’s time to ease as long as disinflation continues.
“Should the incoming data continue to show that inflation is moving sustainably toward our 2% goal, it will become appropriate to gradually lower the federal funds rate to prevent monetary policy from becoming overly restrictive on economic activity and employment,” Federal Reserve Governor Michelle Bowman said on Saturday.
Bowman, who until recently insisted another rate hike was still on the table, nudged back on bets of big rate cuts based on the July employment report alone, saying it may have “exaggerated the degree of cooling”.
