Soft Macro This Week/Bessent's Attempt

The stock market will likely focus on corporate earnings and Iran developments this week.  It also will face evidence on three macroeconomic items -- the Fed's targeted inflation rate (PCE Deflator), consumer spending and Fed Chair Warsh's Jackson Hole Speech.  Their impacts on the market may be muted as they will not likely change the overall picture of subdued inflation, soft consumption and steady Fed monetary policy.  

Consensus looks for a slight speedup in the PCE Deflator in July from the June pace.  It sees Total up 0.1% m/m after -0.1% in June.  Core PCE Deflator is expected to rise 0.2% after +0.1% in June.  The risk is for a lower-than-consensus print, based on a smaller weight given to housing rent in the Deflator than in the CPI (where it was +0.3% in July), more weight given to apparel (which was +0.1% in July), and an offset to the +2.2% m/m airfares in the CPI with the -3.4% in the PPI.   The consensus estimate of the y/y for the Core PCE Deflator is a steady 3.3%.  The risk is for 3.2%.

Consensus expects a slowdown in Consumer Spending to +0.2% m/m in July from +0.3% in June, reflecting the drag from July Retail Sales reported last week.  Consumer Spending would still be up in real terms if the consensus 0.1% estimate of the PCE Deflator prints.  Even so, downward revisions to May and June Retail Sales are a factor behind the consensus estimate of a large downward revision in Q226 Real GDP Growth to 1.5% (q/q, saar) from 2.1%.  However, there is more to the overall economic picture than just consumption.  Strong business investment is expected to be seen in increases in July Durable Goods Orders and its major components.

BLS will announce its estimate of the Benchmark Revision to Nonfarm Payrolls.  The benchmark is based on a universal count (derived from unemployment insurance data) as of March 2026 and incorporated in the January 2027 Payroll figure released next February.  Some analysts look for a modest downward revision, which would likely be a non-event since it would be well within the historical range.  Benchmark revisions were downward in 7 of the past 10 years, ranging from -1k  to -898k (average -298k).  It was a huge -898k in March 2025.  Upward revisions ranged from +138k to +568k (average +360k). 

Fed Chair Warsh is likely to reiterate that economic growth is solid, labor market steady and inflation still too high -- and that the Fed is adamant to seeing the latter come down.  However, he also should stick to his plan to not specify future monetary policy or project the future path of the economy.  Instead, he may discuss the Task Forces that he has set up to evaluate Fed communications, Fed balance sheet, economic data, productivity and jobs, and inflation targets.  At this point, Warsh has said the Fed's Central Tendency Forecasts will not likely be published after this year.  Discussing these Task Forces will probably be academic and market neutral.

The so-far failed attempt by Treasury Secretary Bessent to lower longer-term Treasury yields by shifting Federal Government financing to the short end is reminiscent of the academic debate that, I believe, began in the 1970s.  The Yale school of thought,  pushed by Jim Tobin, argued that relative supply of longer-term Treasuries (relative to supply of  short-term Treasuries) affects their yield.  The MIT-Penn school of thought, pushed by Franco Modigliani and Albert Ando, argued that expectations of future short-term rates and inflation were the dominant determinants, not relative supply.  Work that another economist and I did at the NY Fed showed that expectations of the Federal deficit and the volatility of the dollar against major currencies in the FX market also had an influence on longer-term yields, besides short-term rate and inflation expectations.  The quick reversal of the dip in longer-term yields from Bessent's announcement would seem to support the MIT-Penn school of thought.  Similarly, my impression at the time was that Fed Chair Ben Bernanke's QE  (quantitative easing: Fed buying longer-term Treasuries) had more effect on the stock market than longer-term yields.   

Although the high Federal Government debt (hitting $40 Tn) received a lot of attention, the renewed increase in oil prices, with the risk that the Iran war will push them up further, may be the more significant factor behind the latest run-up in longer-term yields as it lifts inflation expectations.  Moreover, with the Fed so far reluctant to raise the funds rate, expectations of future rate hikes may have risen, as well.  Another way of putting this is that with Fed policy steady, the burden of fighting inflation falls more on future policy and thus longer-term yields.

  

US Data More Mixed Than Appears

The stock market may be range bound this week, as it focuses on the implications of recent US economic data for Fed monetary policy.  The data were more mixed than market commentators appeared to acknowledge and argue for steady Fed policy.  The July inflation data were ostensibly soft, but some aspects were troubling.  July Retail Sales were weak, but early estimates of Q326 Real GDP Growth remain strong.  These data printed after the July FOMC Meeting, so this week's release of the Minutes will not reflect this new information.  The next opportunity to get a sense of Fed thinking will be Fed Chair Warsh's speech at the Jackson Hole Symposium on August 27-29.  However, he already has said that he may focus on his Task Forces rather than future monetary policy.   He, of course, will emphasize the Fed's goal to bring inflation down.

The July CPI headlines (0.1% m/m Total and 0.2% Core) seem to confirm a slowing inflation trend, as the y/y slipped for both.  But, some components remain worrisome.  In particular, Primary Rent and Owners' Equivalent Rent both sped up to the old 0.3% trend (3.6% annualized).  It will be difficult to hit the Fed's 2% inflation target on a sustained basis if rent doesn't slow to a 0.2% or lower m/m trend.  Also, computer prices rose sharply both in the CPI and PPI, likely resulting from memory chip shortages.  Fed officials have mentioned the impact of AI investment on some prices as one factor making it difficult to hit their target.   This factor should be temporary, disappearing as the memory shortage is resolved.  However, the latter could take time.

The July PPI headlines (0.0% m/m Total and 0.2% Core) understated the underlying pace.  The underlying Core Less Trade Service rose 0.4% m/m (about 5.0% annualized) -- the same high pace as the H126 average and well above what would be consistent with the Fed's 2% target.  

Although July Retail Sales fell, the decline could be just the typical pause after a string of strong months.  It also could be just a one-off unwinding of the boost to sales from  tax refunds in the Spring.  Nevertheless, a slowdown in consumption would not be inconsistent with the slowdown in job growth over June and July.  The Atlanta Fed model lowered its forecast of Q326 Real GDP Growth to 4.3% (q/q, saar) from 4.8%, but it is still well above trend.  The model estimates that consumption will grow 2.5% in Q326 -- which would require a bounce-back in Retail Sales in August and September -- and that other components of GDP will grow, as well.

Although the July FOMC Minutes will not reflect these latest data, the markets will likely look for clues on participants' views of the likely path of monetary policy.  The Minutes of the June Meeting indicated a fairly even split between those expecting steady to slightly easier policy and those expecting tighter policy by year end:

   "Regarding participants’ individual assessments of appropriate monetary policy under what each participant judged to be the most likely scenario for the economy, many participants indicated that the
appropriate level of the federal funds rate would be within or slightly below the current target range at
the end of this year. Many other participants, however, assessed that the appropriate level of the
federal funds rate would be above the current target range at the end of this year."    

The July Minutes could indicate a shift toward the tighter policy group, given that there were three dissents that favored a rate hike at the Meeting.  The markets should be cautious taking such a shift at face value, since some of the hawks could have pulled back their expectations of the year-end funds rate after the latest economic data.

 

 

 

                                                                  

                          

 

 

Macroeconomic Evidence Turning Benign For The Fed?

The stock market may be helped by soft inflation data this week.  Along with Friday's soft July Employment Report, they would argue for steady Fed policy at the September FOMC Meeting. 

Consensus looks for +0.1% m/m Total and +0.2% Core for the July CPI.  The y/y would fall to 3.3% from 3.5% for Total and to 2.5% from 2.6% for Core.  Moreover, lower-than-consensus prints for Total and Core can't be ruled out.  Owners' Equivalent Rent would need to stay low.  Lodging Away From Home needs not to rebound after falling in June, and Airfares need to stay low despite a boost from seasonal factors.  Retail Gasoline Prices should fall again, despite the renewed Iran war.

The July Employment Report showed a soft labor market, possibly reflecting the impact of AI on jobs.  Besides the decline in Payrolls, there appears to be a continuing amount of discouragement to look for jobs.  So, while the Unemployment Rate fell, it may overstate the strength of the labor market.  Indeed, the slight uptick in Average Hourly Earnings also hinted at a soft labor market.

The -20k m/m drop in Nonfarm Payrolls was concentrated in State and Local Government Education jobs (-50k), likely temporary and related to the end of the school year.  More importantly, the below-trend 30k increase in Private Payrolls -- the second such modest gain in a row, both less than half the 80k 3-month average ending in June --  reflected a sharp slowdown in Service-type sectors -- possibly sectors in which implementation of AI is concentrated.  Private Service-Providing Payrolls rose only 5k, after +16k in June.  Both months were substantially weaker than the prior trend.  Cyclical sectors (manufacturing and construction), in contrast, continued to climb.

At this point, it is possible a productivity jump may offset the weak job growth -- consistent with a boost from AI.  With  the Nonfarm Workweek flat and Total Hours Worked up only slightly, the latter stands just 0.1% (annualized) above the Q226 average.  Productivity should be strong in Q326 if the Atlanta Fed Model's early estimate of 5.8% (q/q, saar) for Q326 Real GDP Growth is right.  A productivity jump would support the idea of substitution of AI for labor being responsible for the weakness in job growth.

The dip in the Unemployment Rate to 4.1% fro 4.2% in June may overstate labor market strength to the extent it resulted from people dropping out of the labor force.  The Labor Force Participation Rate has trended down since a peak of 62.5% in November 2025.  This downtrend continued in July, as it slipped 0.1% point m/m to 61.4%.  The downtrend looks to be more than just the effect of the small Household Survey or fully explained by an aging population in which older people are less inclined to work than younger people.

Although it is too soon to say that the soft 0.1% m/m increase in Average Hourly Earnings (AHE) is the new normal, it opens the door to this possibility.  The slowdown from a 0.3% m/m trend was widespread.  10 of 13 major sectors slowed from June and 9 were slower than their Q325 average. Along with the soft Q226 Compensation/Hour and Unit Labor Costs (2.7% and 1.3% (q/q, saar), respectively) reported last week, July AHE is good news for the inflation outlook.  

 

 

 

  

Fed Leading From Behind?

The stock market will be entering a period of seasonal volatility and weakness in August and September with little guidance from the Fed.  Fed Chair Warsh appears content to let the markets decide how to react to incoming data by themselves.  He does not want them to react to how they think the Fed will view the data.  The risk is that the markets' tendency to overreact to information will be even greater, although he didn't say this.  This week, key data are mostly expected to be on the stronger side.  They would indicate solid economic growth (stock market positive) but possibly lift longer-term Treasury yields (stock market negative).  Iran war developments may have turned positive, at least for the moment.  Dollar-Yen intervention in the FX market could have mixed implications for stocks

Fed Chair Warsh gave the impression the Fed is not ready yet to take a leadership role in steering the economy toward the 2% inflation goal at last week's post-FOMC news conference.  He said Committee members focused at the Meeting on analyzing issues -- separating the effects of price shocks (stemming from the Iran war, tariffs and AI) from underlying inflation and how monetary policy tools could work to bring inflation down.  He said there was broad consensus on the Fed's commitment to hitting its inflation target and that it has the tools to do so.  Warsh did not say members focused on how or when the Fed would use them.  And, the whole discussion, as described, seems to have been academic and an avoidance of debating the timing of a rate hike.

Warsh seems to want to wait to hear from his Task Forces before making a decision.  And, he said he will be hearing from them within the next several weeks.  He suggested he might discuss the Task Forces' missions at the Jackson Hole Conference (August 27-29).  Meanwhile, he is counting on the markets to take the lead and react to incoming data.  However, he said the Fed will not be constrained by market views on monetary policy.  So, a market's expectation for a September rate hike is not a guarantee the Fed will move then.

Indeed, Warsh conceivably may view a reliance on markets to tighten as a way to avoid a politically sensitive hike in the Fed funds rate.  By insisting the Fed wants to lower inflation, he signals the Fed's goal to the markets, expecting them to move in ways that will achieve that goal.  If this interpretation is right, the funds rate will stay where it is in coming months and Warsh will continue to assert the Fed's desire for lower inflation while the markets react to incoming data.  The question will be whether Warsh loses credibility by not following his words with action. 

Alternatively, it is conceivable that last week's decision to keep rates unchanged reflected a desire by a majority of FOMC members to maintain former Fed Chair Powell's "wait and see" policy approach.  If that's the case, Warsh may not control the FOMC, unlike prior Chairs.  His talk of the Fed having a "laser focus" on fighting inflation may have to be discounted.  Also, upcoming July and August inflation data could be critical to the Fed's decision whether to hike rates at the September 15-16 FOMC Meeting.  Benign data could keep rates steady.  The July CPI will be released August 12 and the August CPI September 11.  

This week could test Warsh's reliance on markets to respond appropriately to US economic data.  Key data are expected to improve m/m, pointing to a speedup in economic growth in Q326.  The strength would be consistent with the Atlanta Fed model's preliminary estimate of 5.0% (q/q, saar) for Q326 Real GDP Growth, after Real GDP rose 1.5% in Q226.  

The July Employment Report is expected to show a speedup in job growth.  Consensus looks for Nonfarm Payrolls to climb 91k m/m, versus +57k in June.   The Unemployment Claims data support the idea of a speedup.  Although consensus expects a rebound in the Unemployment Rate to 4.3% from 4.2%, both the dip in June and uptick in July could be chalked up to noise.  The Bureau of Labor Statistics says such small moves are not statistically significant.  Moreover,  the risk is that the Unemployment Rate prints below consensus, based on the Claims data.  Rounding analysis also suggests the risk is for a below-consensus print.  The un-rounded Unemployment Rate was 4.19% in June.

The wage data can be important, as well.   Consensus sees a trend-like 0.3% m/m increase in Average Hourly Earnings,(AHE) matching June's increase.  This pace would be consistent with 2% price inflation if Productivity Growth is trending in the 1.5-2.0% (annualized) range.  A problem, however, is that Productivity has been weak so far this year, up only 0.7% (q/q, saar) in Q126 and expected at 0.3% in Q226 (released on Thursday).  Productivity will most likely jump in Q326 if the Atlanta Fed model's GDP estimate is right, which could bring this year's trend back in the desired range.  So, a 0.3% m/m print for AHE would probably be taken in stride by the market.  A higher print should be a negative and vice versa.

Most other data this week are expected to improve.  In particular, the Mfg ISM is expected to rise to 54.0 in July from 53.3 in June, bringing it back to the March level.   Construction Spending also is expected to speed up, to +0.2% m/m in June from +0.1% in May.  However,  the JOLTS Data' Job Openings are seen pulling back to 7.25 Mn in June from 7.59 in May, suggesting a dip in the demand for workers (belied by a stronger Payroll print in July).