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.