Dovish Speech At Jackson Hole?

The stock market should continue to be buoyed this week by expectations of a dovish speech by Fed Chair Powell at the Jackson Hole conference on August 24-26.  He is likely to acknowledge progress against inflation while economic growth has remained solid.  He may indicate that the Fed will soon be ready to pull back gradually from a restrictive monetary policy stance in order to sustain this growth, given that policy changes often are mentioned at this conference.

Last week's US economic data supports a gradual relaxation of monetary policy.  While the inflation data were good, they were not altogether soft.  The real-side data were mixed, but overall consistent with another quarter of growth.

Stocks rallied sharply on the low July PPI headlines of +0.1% m/m Total and 0.0% Core.  But, these were held down by the volatile, if not questionable, Trade Services component.  Core Ex Trade Services rose 0.3%, matching its average over the first half of the year.  It suggests steady inflation ahead.  

Stocks paid less attention to the July CPI, which came in as expected at 0.2% m/m for both Total and Core.   The measure favored by Powell -- Core Less Shelter -- was even better at 0.0% for the third month in a row.  However, Shelter sped up, with Primary Rent rising  0.5% after 0.3% in June and Owners' Equivalent Rent at 0.4% after 0.3%.  Although the speedups could be just offsets to the below-trend June prints, even an average of the two months would argue against expecting rent to trend down.  A steady trend in the rent component of the CPI could make it difficult for the Fed to achieve its 2% inflation target.

Stocks rallied again on strong July Retail Sales.  There was little pullback from the June jump in sales, setting up the possibility of a speedup in consumer spending in Q324.  The July level of Ex Auto/Ex Gasoline Retail Sales is 4.0% (annualized) above the Q224 average.  This compares with a 2.9% q/q (saar) pace in Q224.  Also, the Unemployment Claims data are leaning to a stronger labor market.  Initial Claims fell below the July average in the past two weeks.  Although Friday's release of July Housing Starts showed a large m/m drop, it seems to be largely weather related.  The bulk of the drop was in the South, which had been hit by large storms.

The Atlanta Fed model's projection of Q324 Real GDP Growth is now 2.0% (q/q, saar).  This could change as more data come in.  As it stands, it is in line with the Fed's estimate of the longer-term trend in the economy.  And, from the Fed's perspective, a highly desirable pace that should allow for some easing in monetary policy.