A Shift in Risks -- What Will Data Say?

Stocks may continue to be supported if not move up in expectation of a Fed rate cut at the September 16-17 FOMC Meeting after Powell kept open the door, acknowledging a possible shift in the balance of risks toward a softer labor market.  What will be important is evidence from upcoming data that economic growth has slowed and the labor market has indeed softened.

The important Unemployment Claims data support the idea that the balance of risks has shifted somewhat toward weaker economic growth and softer labor market.  Both Initial and Continuing Claims are slightly above their July average.  So far, they suggest a smaller increase in Nonfarm Payrolls in August than in July (+73k m/m Total, +83k Private).  And, they hint at an increase in the Unemployment Rate, which would put it above its recent range.  Note that the Unemployment Rate almost printed 4.3% in July, having rounded down to 4.2% from 4.248%.  The unrounded July level suggests a greater chance for the Rate to tick up than down in August.  A soft August Employment Report, due September 5,  would likely pave the way for a September Fed rate cut.

Powell also affirmed that the Fed is targeting 2.0% inflation, arguing that low, steady inflation is required to sustain a solid labor market.  Maintaining this target suggests the Fed will be cautious in easing, cutting by only 25 BPs in September and possibly skipping a cut at the following FOMC Meeting to see how inflation evolves.  Although Average Hourly Earnings in the August Employment Report will not likely be the critical component regarding a September rate cut, a 0.3% m/m or lower print would support the idea that tariffs are not leading to a broader pickup in inflation while a higher print could raise some doubt about this idea.

This week's release of the July PCE Deflator is expected to be a bit on the high side, up 0.3% m/m for Total and Core.  The y/y would rise for both.  High prints would not likely stand in the way of a September rate cut, as some of the increase is attributable to tariffs and could be one-off.  

Other data this week are expected to post modest gains, particularly after taking account of inflation.  July Personal Income and Consumption are seen speeding up to 0.4-0.5% m/m from 0.3% in June.  However, they would be up only slightly after adjusting for the expected 0.3% increase in the PCE Deflator.  July Durable Goods Orders are projected to decline sharply for the 2nd month in a row, likely resulting from a drop in aircraft orders.  The underlying Ex Transportation and Nondefense Capital Goods Excluding Civilian Aircraft are seen up slightly.  There is a risk the latter will rebound more sharply after falling 0.7% m/m in June.  The latter is a leading indicator of Business Equipment Spending, which Powell pays attention to.  But, a rebound should not get in the way of a September rate cut.