The PPI data yesterday here suggests that there is some disconnect between price pressures that we’re seeing in the US. While producers are seeing increased costs, it isn’t so much so evident in consumer prices just yet. And that’s bringing us back to this conversation here: The big boys might not feel the pinch of tariffs but everyone else is
Eventually, there has to be some passthrough in costs and the impact of tariffs will have to be redistributed. Otherwise, companies are going to suffer even more in the quarters ahead. And that might be a warning signal for the Fed, in keeping their eye on the inflation meter.
Going back to Fed pricing now, we are seeing traders cool bets on a rate cut after the data yesterday. Fed funds futures show just ~93% odds of a rate cut for September after having fully priced in a rate cut in the days before. Besides that, it shows just ~57 bps of rate cuts priced in by year-end and that is the same before we got to the US CPI report earlier this week. That is down from ~61 bps in the aftermath of the inflation numbers.
So, what’s the takeaway here?
Traders are still very much banking on a rate cut in September, expecting the Fed to follow through on what looks to be further softening in labour market conditions and the fact that tariffs inflation hasn’t shown up in consumer prices. On the latter though, there are expectations of a pick up in the fall. But the question for the Fed is, can they really afford to wait for it to come? And what happens if it doesn’t?
As such, would moving by 25 bps in September be prudent as policy would still be relatively restrictive to deal with supposedly temporary inflation pressures from tariffs while satisfying markets on wanting lower rates to help the economy? It’s a fine balance.
But what is clear now is that a 50 bps move is not warranted, at least from the presented data. And policymakers have not been shy to push back on that. Musalem was the latest voting member to do so here yesterday and while he did issue some caution on inflation, he tried very hard to argue that he is still on the fence when it comes to the decision in September.
Markets will be looking to Powell’s speech at Jackson Hole next for some key commentary guidance. However, I’m one to argue that they will be disappointed if anticipating the Fed chair to affirm or confirm expectations for September. But even so, that won’t stop markets from sticking with the current pricing until something changes in the data.
And that means it will rest on the next US jobs report on 5 September.
This article was written by Justin Low at investinglive.com.
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