Markets are watching the upcoming inflation and consumer spending figures closely after last week’s volatility sparked by a disappointing jobs report that showed that bad news is bad news.
“Since the release of the July employment report, financial markets have focused on the labor market and the implications for Federal Reserve policy, but the other side of the Federal Reserve’s dual mandate will come back into focus over the course of the coming week,” Oxford Economics chief economist Nancy Vanden Houten wrote in a note to clients on Friday.
The Consumer Price Index (CPI) for July will be the next big test for inflation (and for the markets).
“We expect the consumer price index for July to be somewhat less benign than the weaker-than-expected readings in June, but do not believe the data will shake the Fed’s confidence that inflation is moving in the right direction,” Houten said.
Inflation, which includes food and energy prices, is expected to rise 3%, unchanged from June, according to Bloomberg consensus estimates. However, the reading is expected to rise 0.2% month-on-month, after falling 0.1% in June.
On a “core” basis, which excludes the more volatile costs of food and energy, inflation is expected to rise 3.2% year-on-year, slowing from the 3.3% increase in June. Monthly core prices are expected to have risen 0.2%, compared with a 0.1% increase in June.
According to the CME Fedwatch tool, markets on Monday expected a probability of about 52 percent that the Federal Reserve would cut interest rates by 50 basis points by the end of September. The week before, the probability was 85 percent.
“In our view, financial markets have overreacted to the latest employment statistics and priced in a 50 basis point rate cut for September and a cut of more than 100 basis points for the full year,” Houten wrote.
“Over the course of the week, markets have scaled back their expectations, although they continue to expect cuts of more than 50 basis points than we expect for the year. We acknowledge an increased risk of more aggressive policy normalization if future employment reports are weaker than expected, but are comfortable with our baseline forecast.”
