Anyone hoping for a clue to the Fed’s Sept 17 intentions is out of luck

Today the news includes eurozone merchandise trade and the US housing index. And oh, yes, Pres Zelensky and a gaggle of European leaders meeting Trump in Washington to decide how much real estate Mr. Z has to give up to stop the war, possibly more of Dombas than Russia has already grabbed.

It’s not much of a week for data. We get the UK CPI and PPI with retail sales on Friday. The US jobless claims on Thursday will get more attention than usual because rate cut fans want to see a lousy number to buttress their expectations. The US reports the usual slate of housing data and everybody reports composite PMI flashes.

The Jackson Hole conference begins. Anyone hoping for a clue to the Fed’s Sept 17 intentions is out of luck. 

There’s not much upcoming to sway opinion. It’s a little interesting that the CME FedWatch tool shows the probability of the Sept rate cut starting to slip. As of this morning, that probability was 82.6% from 85.9% a week ago, while the probability of no cut rose to 17.4% from 14.1% a week ago.

We find even a slipping probability more than a little peculiar. Did nobody see the data last week? Clearly inflation is about to hit, and with the unemployment situation in okay condition, the Fed “should” not be cutting rates. This has been the case since the April tariff story. Why do so many persist in believing in that rate cut?

Last week we stayed away from the data releases, but couldn’t miss CPI (bad for the Sept rate cut outlook) and then the PPI (even worse).  The weird thing was not the data, but rather the ho-hum response in the bond market.

On the surface, some smoke but no fire. July PPI rose 0.9% m/m and rose 3.3% y/y, with core up 0.9% m/m and 3.7% y/y.

But smoldering under the surface is core services CPI, up 4.5% annualized and 60% of total CPI. We will get PCE on Aug 29 and it will contain some of the services components of the PPI. And that blew up to the highest since 2020. PPI for Services rose 1.08% in July m/m and 13.8% annualized. That drove core PPI Final Demand up by 0.92% m/m and 11.6% annualized, the worst since Mar 2022. Overall final PPI Final Demand rose 0.94% and 11.9% annualized.

WolfStreet does a masterful job, with charts, explaining that PPI does not track import prices and one can infer tariff effects only indirectly. PPI measures inter-company prices. “The tariffs are percolating through the prices that companies charge each other, but have shown up only in small increments in consumer prices, totally overpowered by the renewed surge of inflation in services, which are not tariffed, which often have little price competition, and where consumers do most of their spending. It’s services inflation at the consumer level that is so hard for the Fed to contain, which is why the Fed fears services inflation so much.”

For finished goods, the PPI accelerated only slightly to 2.85%, but still the worst since June 2023. Wolf reminds us to expect zigzags in the upcoming data. “… PPI reflects what companies charge other companies – not consumers. Companies paid $28 billion in tariffs in July, and they paid $27 billion in June, and $22 billion in May. Tariffs are a tax, but tax increases are hard to pass on, and tax cuts are never passed on.

“But we can see the tariffs percolating through the ecosystem of companies as they’re trying to pass on some of the tariffs to other companies, and these other companies are resisting those price increases. The far bigger concern here is inflation in services, which are not tariffed, which are a much bigger part of US economic activity, and where roughly two-thirds of consumer spending goes to.”

For the charts, go to Core Services PPI Explodes, Worst since March 2020, Causes Overall PPI and Core PPI to Explode | Wolf Street.

So far the US consumer is okay and even spending less on credit. We get earnings reports from WalMart this week, among other big retailers. Bloomberg reports “Analysts are ratcheting up earnings estimates for S&P 500 companies at the swiftest pace in nearly four years, a Citigroup index shows. The brighter outlook marks a dramatic turnaround from earlier in the year and helps explain why the benchmark is marching from one record to the next.”

That gives us the clue that unless and until the stock market gets the colly-wobbles, the dollar benefits from the second-hand optimism. There have been plenty of gloomsters pointing out that P/E ratios are elevated, the index gains are due to too-few names, etc., but so far, equities are holding up nicely. If and when the S&P responds to what Trump is doing with disapproval and selling begins, we can expect an about-face from Trump, because he really does believe his tenure is being judged by the stock market and to hell with polls.

A secondary effect the emerging markets starting to benefit from the dollar’s softness, which Bloomberg’s Authers says is the “the worst first-half performance in over 50 years. That means gains in emerging markets, where carry traders are swooping in to cash in on the arbitrage. That is clearest in the traditional carry trade, which borrows in yen and parks in the higher-interest-rate economies of Latin America, led by Brazil and Mexico.”

Forecast

The FX market is still dithering and it would take something sizeable to shove the dollar one way or the other by very much. In fact, we can draw a mini-resistance line from the July 1 high that lands today at 1.1748.

It’s unlikely that the Ukraine talks are going to be what moves the euro or the dollar, although you’d think Trump’s massive shortcomings should be dollar-negative.  We still do not see much evidence of the so-called regime change that makes the euro a better store of value and safe haven. It may well be coming, but not yet.

Tidbit: From The Economist magazine: Swiss exports of gold to the US used to average about $4.,5 billion. In 2024, that rose to $12.5 billion. For the first five months of 2025, the number is a shocker--$48 billion. Gee, wonder what caused that flight to safety?

Geopolitical Tidbit: Ukrainian Pres Zelinsky visits Trump in Washington today. He got kicked out rudely last time. Will he get a red carpet like Putin this time? Trump has to convince him to accept the loss of real estate, so the courtesy level will be higher. But the message will still be that Trump is in the process of selling him down the river, with complete disregard for the 1994 agreement to border security if Ukraine would give up the nukes. Not a single serious commentator thinks Trump won anything with this visit. One pointed out that Putin sideswiped Bush II and Obama, and Trump is a lot less smart than even Bush. Putin is still in charge and he wants Ukraine as a Russian territory. This is not ending soon.

On Sunday Trump said an Article 5-type deal for Ukraine is possible, but the US failed to enforce the 1994 agreement, so it’s meaningless. Besides, both Putin and Trump are consummate liars and Z. knows perfectly well not to believe a single word, so he will get the blame for the failure of “peace” talks.  Admiral Stavridis says the Alaska meeting was a case of rope-a-dope, but others point out Trump had Putin walk past giant military aircraft and had some flying overhead, as though Putin should have been impressed. But with Trump toadying up to him—and not objecting to Putin claiming the war is Ukraine’s fault—Putin must think he was the clear winner.

Eastern European experts say that red carpet was a sign of disrespect for central and eastern Europe, and that’s what Putin will have noted. After all, Putin is an authentic tyrant, and Trump is just a wannabe. Putin has a warrant out as a war criminal by the International Court and Trump is a convicted felon. Putin invaded a sovereign state against all rules, laws and norms, and Trump seems not to know or care about that, thereby looking even more ignorant than usual. One expert says Trump thinks Russia is still the behemoth of the 1980’s, while in fact its economy is crumbling and conditions are dire. But Trump doesn’t read factual briefings.

Both Putin and Zelinsky have a trump card—Trump wants the Nobel really, really badly. It’s under his skin that Pres Obama got one. He may have to go to the next Putin meeting with some demands he neglected to mention this time. Putin will never agree and will hold that Nobel over Trump’s head for a very long time. This is far from over.

The Ukraine war is having little effect on financial markets. No one thinks a deal is even remotely close. But looking far, far down the road, if a deal gets reached and that liberates Russian oil from sanctions, does the price go down on the supply added to the global amount? Presumably Ukrainian exports of grain and other ag products are liberated, too, and maybe the stock prices of European reconstruction companies. Will there be a Marshall Plan? 

When the war is over, does the euro fall back on the idea that it’s not the new safe-haven currency after all? We await a breakup of the US and Europe, or rather, Trump and Europe. It will take a decade to fix the damage. Crunch time in FX, perhaps, but in very slow motion. 

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