Inflation Numbers Keep Rate Cuts In Play

Equities moved higher last week as inflation data did nothing to curtail expected rate

cuts next month. The Consumer Price Index for July came in as expected month-over-month (+0.2%), but was lower than expected on a year-over-year basis (+2.7% vs +2.8%). Essentially, inflation was flat versus last month. The categories most affected by tariffs - Apparel & Autos - showed little movement. The Producer Price Index increased in July (+0.9% vs +0.2% expected). While it should not be discounted entirely, more than half of the increase in July came from final demand trade services (warehousing, transportation, & retailers). Clearly, tariffs are having an effect on producers, but as we pointed out last week, both U.S. businesses and foreign exporters are bearing the brunt of tariff costs.

The debate last week became more about will there be a 25 basis point rate cut next

month or a 50 basis point rate cut. Fed governors who had speaking engagements last week quickly quelled the idea of a 50 basis point rate cut. However, even with the PPI increase, there is still nearly an 85% probability of a 25 basis point rate cut at the next FOMC meeting. It's important to note that a rate cut by the Fed could alleviate producer costs - such as financing - that would offset increased expenses due to tariffs.

The economy continues to show resilience as earnings and spending edge higher.

Retail Sales for July came out last week slightly lower than expected (+0.5% vs +0.6%), but were still up +3.9% on a year-over-year basis. The weekly data supports the monthly data. Redbook Sales on a year-over-year basis are up +5.7%. BofA card data shows robust spending of +3.5% on a year-over-year basis. The Atlanta Fed's GDPNow shows +2.5% estimated growth for Q3 GDP, even though the Net Exports component is still slightly negative. Expect some choppy trading until we reach next month's Fed meeting.

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