The stock market may get a boost from the Fed this week, either by a rate cut at the FOMC Meeting or comments by Fed Chair Powell opening the door for a September ease at his post-meeting news conference. The macroeconomic data, showing modest growth and low inflation, don't stand in the way of a cut. In particular, the slow economic growth in H125 may be enough to prevent the tariffs from spurring a wage-price spiral. Wage data so far don't show any sign of acceleration. And, the trade agreement with the EU may very well remove any hesitation on the part of the Fed to ease this week. The 15% tariff is much less than the 30% Trump had threatened, so the inflationary risks are lower, as well.
Trump's visit to the Fed was unfortunate, tainting a Fed rate cut with the suspicion that it is politically motivated. However, regardless of whether the Fed decides to bend to political demands or to move independently because a rate cut is desirable, Trump's comments suggest that a policy easing either this week or September is in the cards. He hinted that a rate cut is coming, saying he doesn't think firing Powell will be "necessary," since Powell "will do the right thing."
The Fed probably doesn't believe the choice of a July or September rate cut would make much difference for the economy. The lags between policy change and the economy are long. There could be a different impact on the stock market, however. A July cut could cushion or reverse the typical weakness seen in early August. In contrast, postponing an easing to September could allow a seasonal decline in stocks in August. However, prospects for a September cut would likely make any seasonal weakness short-lived.
Key evidence on the economy will be released after the FOMC Meeting, including the June PCE Deflator, Q225 Employment Cost Index, July Mfg ISM, and July Employment Report. Consensus estimates would confirm that inflation is under control and economic growth is modest.
Consensus estimates 0.3% m/m for the June Total and Core PCE Deflator. Such an increase is a little on the high side, but could be taken in stride after 0.1% prints in the prior 3 months. Also, a 0.2% increase in the June Core PCE Deflator can't be ruled out. Nor could a steady 2.7% y/y be ruled out, which could be the case if the m/m rounds up to 0.3%. Any revisions to past months could affect the y/y, as well.
The other important inflation-related report this week is the Q225 Employment Cost Index (ECI). Consensus looks for 0.8% q/q, down from 0.9% in Q125. Recent history supports expectations of a slowdown in the ECI. This is because Average Hourly Earnings (AHE) slowed this quarter and AHE and ECI moved in the same direction in each of the prior 3 quarters (see table below). Indeed, recent history suggests the Q225 ECI could come in below consensus, since ECI rose be less than AHE in each of the past 3 quarters.
This week's real-side data are expected to improve a bit from the prior month, but the levels are expected to remain low and support the idea of modest growth. Consensus looks for Consumption to bounce to +0.4% m/m in June from -0.1% in May. But, in real terms (that is, adjusting for inflation) it would be up only 0.1% and stand slightly below the Q225 average -- a soft take-off point for Q325 Real Consumption. Real Consumption looks to have risen about 1.5% (q/q, saar) in Q225, up from 0.5% in Q125 but still modest -- which Powell will play close attention to, since it is a major part of Private Domestic Demand that he likes to track.
Consensus expects Private Nonfarm Payrolls to climb faster in July than in June (consistent with the implication of the Unemployment Claims data) but to stay low. It sees +86k m/m versus +74k, staying below the +115k pace associated with a steady Unemployment Rate. Total Payrolls are seen slowing to +102k from +147k, as the June end-of-school-year bounce in State & Local Government jobs unwinds. Other parts of the Report are expected to be supportive of a Fed ease, with the Unemployment Rate rebounding to 4.2% from 4.1%, AHE moving back to the 0.3% trend (after a low 0.2% in June), and the Nonfarm Workweek remaining at a low 34.2 Hours (prior trend was 34.3 Hours).
The July Mfg ISM is expected to continue to indicate a sluggish manufacturing sector. Consensus sees an uptick to 49.6 from 49.0 in June.
The US-EU trade agreement, as well as the other recent trade agreements, will probably take time to affect the US economy. When the large increase in US exports and EU investments in plant and equipment do occur, the markets would likely move to crowd out other spending if the economy is operating near full employment. The net result would be little change in GDP. Ironically, despite Trump's desire for a Fed rate cut, the latter would make a full-employment economy more likely by the time the spending from abroad hits the US economy. To be sure, rate cuts could just offset the drag from higher import prices stemming from the tariffs. The latter are essentially consumption taxes. It will take time to see how all the fall-out from tariffs materializes.
(q/q percent change)
AHE ECI
Q225 0.8 na
Q125 1.0 0.9
Q424 1.0 0.9
Q324 0.9 0.8
Q224 1.0 0.9
Q124 1.0 1.2