Markets considered Tuesday’s CPI report benign enough for the FOMC to cut rates by at least 50 basis points for the remainder of the year. Skyler Weinand of Regan Capital put it best, “Tuesday’s CPI data was tame enough that it gives the Federal Reserve the green light to cut rates by at least 25 basis points and opens the possibility of a larger 50 basis point cut in September.” President Trump’s global tariff policies officially took effect last week. There’s one more government jobs report and CPI report before the next FOMC meeting, offering time for the committee to amass more data to inform their next decision. The body will have to weigh the benefits of cutting pre-emptively to support a floundering labor market against the possibility of inflation picking up again.
PPI delivered an unwelcome upside surprise, posting its highest level in three years, which caused traders to slightly pare their rate bets for the remainder of the year, if only temporarily. Juxtaposing the CPI and PPI data, Clark Geranen at Calbay Investment commented, “The fact that PPI was stronger-than-expected and CPI has been relatively soft suggesst that businesses are eating much of the tariff costs instead of passing them onto the consumer. Businesses may soon start to reverse course and start passing these costs to consumers.”
On the prospect of rate cuts, Treasury Secretary Scott Bessent told Bloomberg TV this week, “I think we could go into a series of rate cuts here, starting with a 50 basis point cut in September...If you look at any model [it suggests that] we should probably be 150-175 basis points lower.” He added, “I suspect we could have had rate cuts in June or July,” ostensibly referring to the recent 258,000 downward payroll revisions for said months. Earlier this week, President Trump nominated E.J. Antoni, chief economist at the Heritage Foundation, to lead the Bureau of Labor Statistics after firing the former head of the agency at the beginning of the month. If the FOMC were to follow suit on Bessent’s position, it would be a repeat of the last year’s 50 basis point cut in September, which Fed Chair Jerome Powell acknowledged earlier this year “was probably a little late.”
KEY INDICATORS THIS WEEK
Retail Sales - A broad-based advance with nine of 13 categories posting increased led by the biggest increase in auto sales since March, while spending at bars and restaurants, the only service sector in the report, fell by the most since February.
Next week - FOMC meeting minutes.