Did The Latest Inflation Numbers Give The Fed Room To Pivot?

Weekly Market Recap Report

Equities moved higher last week as inflation numbers gave hope that the Fed might pivot soon. The major update last week was that inflation was flat-to-lower in July. This provided some hope to bullish investors who took the numbers as a sign the Fed could pivot soon and begin lowering rates.

The Consumer Price Index was flat in July, which lowered the year-over-year number from 9.1% to 8.5%. July’s Producer Price Index was down –0.5% in July, which lowered the year-over-year number from 11.3% to 9.8%. The decline in both CPI and PPI was due primarily to a drop in gas prices. Other elements of the measures continued to rise in July and, historically, both metrics are still high. We think it premature to declare inflation has peaked. If July’s reprieve in inflation can turn into a couple of consecutive months of lower inflation, perhaps we can declare victory.

However, other economic fundamentals continue to struggle.

Initial and Continuing Jobless Claims increased last week, each hitting multi-month highs. There is a clear disconnect between Initial Weekly Claims and the Monthly Payrolls data. Jobless Claims have risen 56% since April, while the Monthly Jobs Reports show an increase of more than 1 million jobs. Job Openings have declined by more than 1 million since May and now Continuing Claims have risen 10% since early June.

The Retail Sales number will be critical to watch this week to determine if the U.S. consumer is still healthy and spending money.

The market is expecting a slightly positive number for July, which would prove a considerable drop in sales compared to June. Housing and Manufacturing data released this week are expected to be flat-to-negative. We could be in for a bit of a range bound market if the economic data doesn’t provide clear direction. The minutes from last month’s Fed meting are likely to be parsed for information on next month’s rate hike. In fact, the futures on September's rate hike have moved close to 50:50 in favor of either a 50 basis point rate hike or 75 basis points. It would seem a Fed pivot is not on the immediate horizon.

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