Markets are currently keeping a close eye on upcoming readings on inflation and consumer data following a volatile week spurred by a disappointing jobs report. The release of the July employment report has shifted the focus of financial markets towards the labor market and its implications for Federal Reserve policy. However, the other side of the central bank’s dual mandate, inflation, will come back into view in the week ahead.
According to Oxford Economics lead economist Nancy Vanden Houten, the July Consumer Price Index (CPI) will serve as the next big test for inflation and its impact on the markets. While the weaker-than-expected June readings were somewhat friendly, the July CPI is expected to show a slight increase. Despite this, Houten believes that the data will not shake the Fed’s confidence that inflation is moving in the right direction.
Bloomberg consensus estimates suggest that headline inflation, which includes food and energy prices, is expected to post an annual gain of 3%, unchanged from June. However, the metric is set to rise 0.2% month over month after a decline in June. On a „core“ basis, which excludes the more volatile costs of food and energy, inflation is expected to tick up 3.2% year over year, a slight deceleration from June. Monthly core prices are also expected to have risen 0.2% compared to a 0.1% increase in June.
As of Monday, markets were pricing in a roughly 52% chance that the Federal Reserve will cut interest rates by 50 basis points by the end of September, down from 85% the previous week. Houten believes that financial markets overreacted to the latest employment statistics, initially pricing in a 50 basis point rate cut for September and over 100 basis points in cuts for the year. However, expectations have since been scaled back, although markets still anticipate more cuts than Oxford Economics expects for the year.
While there is an increased risk of a more aggressive pace of policy normalization if future employment reports are weaker than expected, Oxford Economics is comfortable with their baseline forecast. The projected Fed rate cut path shows a more conservative approach compared to market expectations.
In conclusion, the upcoming readings on inflation and consumer data will be crucial in determining the future direction of the markets and Federal Reserve policy. While there is uncertainty and volatility in the short term, a measured and informed approach is necessary to navigate the current economic landscape.