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.
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