After the past two hectic weeks, investors seem to be returning to more positive considerations, leaving behind the extreme pessimism that gripped the financial markets in the wake of the latest US employment report.
Last week’s macroeconomic figures from across the Atlantic allayed fears of a hard landing for the US economy, and are more in favor of the “sweet spot” that has finally prevailed since the start of the year: falling inflation against a backdrop of a soft landing for the economy, with a labor market that remains resilient.
On the inflation front, the July report fell below consensus expectations for the third month running, confirming the gradual normalization of inflation. Even if, as we wrote in our Monday meeting on July 15, this process is no longer in doubt, with the market focusing more on the health of the economy, this is nevertheless good news which should enable the Fed to start cutting rates in September. But does this mean that the Fed should start cutting rates by 50 bps? Nothing is less certain. Indeed, while the last three monthly variations in the price index are compatible with the Fed’s 2% inflation target and well below the trend seen at the start of the year, the details of the latest data for July are slightly less favourable than those for June, with a re-increase, in monthly terms, in the price dynamics of rents and core services. Insofar as goods prices have been making a negative contribution to inflation for several months now, services will sooner or later have to pick up the slack if we are to continue to see a fall in the price index, which now stands, in annual variation, at 2.9% for overall inflation and 3.2% for core inflation (both down -0.1% in July).
In terms of the US economy, fears of recession were partly allayed by the publication of retail sales that were well above expectations and up sharply in July (in both value and volume), although this rebound was mainly due to a catch-up in car sales, which had been plunged in June by a cyber-attack on software used by car dealers. Nevertheless, US households continue to benefit from a rise in real income (with wages rising faster than inflation), which should continue to support spending and help the economy to make a soft landing. Finally, on the labor market, weekly job registrations also surprised positively, confirming an easing labor market where hiring is slowing but layoffs remain low.
The stars therefore seem to be aligned for the Fed to cut rates. Jerome Powell, who will be speaking this week at the traditional Jackson Hole symposium, could, at the very least, provide some clues as to the Fed’s future stance.
