Against this backdrop, markets are awaiting July’s US consumer price index (CPI) and retail sales data this week. Consensus forecasts point to core CPI rising 0.3% month-on-month from 0.2% in June, with tariffs expected to play a larger role in the increase. “The lower effective tariff collection rate of about 10% in July versus the statutory rate of closer to 14% contributes to high uncertainty about just how much of the tariffs are being passed through to consumers,” say Nayar and Farris. “We think the market reaction to the CPI is probably skewed in favour of Fed rate cuts. A lower-than-expected CPI should increase market pricing for cuts in September and year-end as it reduces the ostensible need for Fed caution about inflation. A higher-than-expected CPI print might cut pricing of a September cut but is likely to leave year-end pricing less affected, because how the unemployment rate changes over the next few months will be the ultimate driver of Fed policy.”
Markets are increasingly focused on the US Federal Reserve’s path for interest rate cuts as equities extend their rally and the US dollar resumes its recent weakness. Futures pricing now reflects an 89% probability of a 25-basis-point (bp) cut in September and full pricing for a total of 50 bps of cuts by year-end.
“Recent Fedspeak makes clear that disagreement within the rate-setting FOMC persists,” according to Vis Nayar, chief investment officer; and Ray Farris, chief economist, at Eastspring Investments in a CIO Views Weekly Bulletin dated Aug 11. “Governor Bowman, who dissented at the July meeting in favour of a 25 bps rate cut, said she now thinks the Fed should cut 75 bps by year-end. Fed Governor Cook appeared to turn dovish, saying that large revisions to the employment data such as those that occurred in the July report tend to indicate turning points in the economy. However, Boston Fed President Collins and St. Louis Fed President Musalem expressed caution about inflation, with Musalem saying he still thought only one cut by year-end may be appropriate.”
