The Federal Reserve's core inflation rate, known as the core PCE price index, aligned with market expectations for July, marking the first significant data point for the Fed's monetary policy following Chairman Jerome Powell's indication of potential rate cuts at the upcoming meeting on September 17. Powell's unexpectedly dovish remarks during the Jackson Hole economic symposium have significantly boosted the S&P 500, pushing it towards record highs.
Following the release of the inflation data early Friday, S&P 500 futures reduced their losses but remained slightly lower, with shares of Nvidia (NVDA) dipping nearly 1% after a 0.8% decline on Thursday linked to earnings reports. The market's cautious response reflects ongoing concerns about inflation trends and potential Fed actions.
In a related development, Fed Governor Lisa Cook is seeking a federal court's intervention to prevent President Trump from terminating her position until her legal case is resolved. Cook's legal representatives argue that the allegations concerning mortgage documents signed before her tenure at the Fed cannot justify firing her for cause, as such actions pertain to her previous role. A court hearing is scheduled for 10 a.m. ET.
If Trump successfully removes Cook, his appointees would hold a majority on the seven-member Fed Board of Governors. This shift could significantly influence decisions regarding the leadership of the 12 regional Fed branches, as five of these presidents have a vote on key monetary policy matters.
A detailed examination of the PCE inflation data reveals that the Fed's core inflation gauge increased by 0.273% month-over-month, marginally better than the 0.3% rounded figure reported by the Bureau of Economic Analysis. The annual core inflation rate climbed to 2.877%, just shy of the 2.9% mark. Notably, despite concerns over tariffs, core goods prices remained stable from June to July, while core services prices rose by 0.36%. Core market-based prices also saw a moderate increase of 0.17% in July, excluding sectors like portfolio management, which experienced significant payment increases due to S&P 500 gains.
The Census Bureau reported a dramatic surge in the U.S. international trade in goods deficit, which expanded to $103.6 billion in July, far exceeding estimates of $87.7 billion. This increase, driven by a 7.1% rise in imports—likely as companies stockpiled ahead of tariffs—contrasted with a slight 0.1% decline in exports. Additionally, June's goods deficit was revised down to $84.9 billion from an initial $86 million.
In the aftermath of the July inflation figures, market participants are now pricing in an 87% probability of a quarter-point rate cut during the September 17 meeting, up from 83% prior to the data release. Furthermore, there is an increased likelihood of at least a 50 basis point reduction in the Fed's key rate over the final three policy-setting meetings of the year, with current odds at 86% compared to a previous 84%.
Personal income increased by 0.4% in July, while personal consumption expenditures rose by 0.5%, both figures meeting economists' expectations. A revision of personal consumption for June indicated a growth of 0.4%, up from an initial estimate of 0.3%, suggesting a resilient consumer base through July. However, economists caution that the full impact of Trump tariffs on consumer prices may still be forthcoming.
The PCE inflation data is primarily derived from earlier reports of the Consumer Price Index (CPI) and Producer Price Index (PPI) published by the Bureau of Labor Statistics. While today's report carried less suspense, the stakes are expected to rise for the August job and inflation data set to be released in early September, ahead of the next Federal Reserve meeting.
In conclusion, the recent inflation data and ongoing developments within the Federal Reserve are critical for investors and policymakers alike as they navigate the complexities of the current economic landscape. For continuous updates on market trends and strategies, be sure to follow IBD's The Big Picture column after each trading day.
