The Fed Gets Some Breathing Room

• Core inflation rose at just 1.6% annualized rate through July with three consecutive months of 0.2% or less increases, showing a declining trend
• Retail sales declined 0.6% in July, the weakest performance in over a year, partly due to Amazon's Prime Day timing shift but affecting multiple categories
• Job market weakened with 23,000 jobs cut in July (first decline since February) and downward revisions to May and June employment data

Summary

The Federal Reserve may adopt a wait-and-see approach on interest rate hikes, as recent economic data suggests slower growth that may not warrant tightening. A rate hike this year, previously considered nearly certain, now appears less likely.

Three Key Economic Indicators:

1. Moderating Inflation: Core CPI inflation rose at just 1.6% annualized over the three months through July. Core inflation increased by only 0.2% or less for three consecutive months, with the six-month moving average trending lower.

1. Weak Retail Sales: July retail sales fell 0.6%, the weakest performance in over a year and below the expected 0.1% gain. While Amazon's Prime Day shift from July to June contributed to the decline, weakness was broad-based across retail categories.

1. Deteriorating Jobs Market: Employers cut 23,000 jobs in July, the first decline since February. May and June job growth figures were also revised lower.

Market Implications:

These converging data points indicate consumer demand and spending may not be strong enough to create persistent inflation concerns, potentially allowing the Fed to delay policy action. Market expectations have shifted significantly since late July, when investors anticipated 1.8 rate hikes by year-end. Current probability estimates suggest roughly 90% chance of just one Fed hike before year-end.

The analysis comes from Horizon Investments' asset management team, authored by Mike Dickson. While 30-year Treasury yields have risen, the overall economic picture suggests the Fed has more flexibility on monetary policy timing than previously anticipated.