Weekly economic commentary: Fed’s challenge: Making sure fire is out against water damage

Summary

United States: Fed’s challenge: Making sure fire is out vs. water damage

• We learned this week that CPI declined in June and core prices rose at the slowest clip since early 2021. With the inflation target in sight, Fed policymakers are taking stock of deteriorating labor market dynamics and souring consumer sentiment as they weigh the outlook for rates.

• Next week: Retail sales (Tues.), Housing Starts (Wed.), Industrial Production (Wed.)

International: Some encouraging signs in Japanese wage growth and UK economic recovery

• This week, some underlying measures of pay growth in Japan bested expectations, potentially reflecting the historically high wage hikes agreed to in this year's spring wage negotiations; we view this as consistent with further Bank of Japan policy normalization this year and into next. In the U.K., monthly GDP figures revealed an ongoing economic recovery.

• Next week: China GDP (Mon.), Canada CPI (Tue.), European Central Bank Policy Rate (Thu.)

Interest rate watch: Balanced risks drive the FOMC closer to a September rate cut

• Since January, the FOMC's post-meeting statement has signaled that neither further hikes were likely nor were rate cuts near. In Congressional testimony this week, however, Chair Powell's comments suggested that the FOMC is getting closer to exiting its holding pattern and preparing to descend.

Credit market insights: Interest expense getting to consumers

• Consumer credit has downshifted thus far in 2024, as mounting personal interest expenses have increased the cost of carrying these debts. Revolving credit, which is primarily composed of credit cards, has driven much of this deceleration.

Topic of the week: "Elevated inflation is not the only risk we face" – Jerome Powell

• Given the material cooling in the labor market over the past year, further deterioration may look less like a welcome “normalization” and more like unexpected weakening to the Fed. We highlighted several cracks in the labor market earlier this year, and six months later, the widespread signs of negative momentum in these worry spots persist.

Download the Full Report!