Nothing to see here

Yesterday’s PCE report gave the Fed exactly the kind of “nothing to see here” print it needed heading into September, despite the fact that their preferred measure of inflation has been above target for 65 months now. The numbers for July: Headline PCE: +3.7% YoY (unchanged from June). Core PCE: +3.3% YoY (in line with forecasts). where do we go from here? Inflation is stuck, not accelerating. Spending is cooling. Real consumer spending was essentially flat, with durable goods purchases actually pulling back. That’s the kind of demand softening the Fed likes to see when it’s trying to bring inflation down without breaking growth. Energy gave a temporary assist. Gas prices fell during the month, which flattered the headline number, something to watch given where oil has been trending since. Markets are pricing patience, not urgency. Futures are showing only about a 1-in-3 chance of a move at the September FOMC meeting, with December looking like the more likely window for any hike. But can they really hike? If they do it, the deficit will go up even higher, simply because 20%+ of the debt is in T-bills that will adjust up immediately. On top of other problems in private debt markets and commercial real estate. It seems this will become a waiting game. The real problem seems to be on the long end of the curve, which is more influenced by fiscal policy. Kevin Warsh will speak from Jackson Hole tomorrow at 10 am. No guidance is expected.

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