U.S. Indices closed lower on Friday with underperformance in the NASDAQ while the Dow outperformed. Sectors, however, were mixed, with Tech and Consumer Discretionary posting the largest losses, while Consumer Staples and Health Care outperformed. The focus on Friday was US data, which saw in-line PCE, albeit the supercore print saw three months of consecutive gains, raising concerns about sticky inflation in the face of tariffs. However, it had little influence on Fed expectations with participants eyeing the August jobs report on Friday. The Chicago PMI data was softer than all analyst expectations, while the trade deficit widened due to a jump in imports. The Final University of Michigan Consumer Sentiment report for August was revised down due to a drop in expectations, while inflation expectations were also revised down. Meanwhile, on the Fed, Governor Cook’s hearing yielded no decision, with both sides asked to provide more documentation this week. Meanwhile, Fed Governor Waller spoke, reiterating his dovish tone, adding he anticipates additional rate cuts over the next 3-6 months, viewing current rates 1.25-1.50% above neutral. On price action, T-notes steepened as Fed independence questions remained, while the dovish Waller saw front-end yields lower. The Dollar was ultimately flat with outperformance in the Antipodes and underperformance in Sterling and the Japanese Yen. Crude prices extended losses into the month-end with desks citing a weaker demand outlook in the US ahead of Labor Day. Gold prices benefited from questions around Fed independence and prospects of a more dovish Fed. Overall, the PCE data were in line. Headline M/M rose 0.2%, cooling from the prior 0.3% pace. The Y/Y rose 2.6%, in line with prior and forecast. The core metric rose 0.3%, matching the prior and expected, with Y/Y rising 2.9%, in line with forecasts but accelerating from the 2.8% prior. Further, the super core measure rose 0.4%, accelerating from the prior 0.2%, seeing the third consecutive month of acceleration, raising stickiness fears of inflation in the face of tariffs. Elsewhere in the report, Personal Income rose by 0.4%, in line with forecasts and picking up from the prior 0.3%, while consumption rose 0.5%, in line with forecasts, also accelerating from the prior of 0.4%. Real spending rose by 0.3%, up from the prior 0.1%. The data did not impact Fed expectations too much. The hot supercore was some cause for concern, but Powell recently said that a reasonable base case is that the inflation effects of tariffs will be short-lived. There is a lot of focus on the labour market, with this week’s NFP likely the next catalyst to shift Fed rate cut expectations. Looking ahead, Pantheon Macroeconomics continue to expect core PCE inflation to peak at 3.3% at the turn of the year, before then easing to about 2.5% by the end of 2026, “That path should allow the FOMC to ease policy substantially over the next year to shore up the labor market; we still expect a 75bp reduction in the funds rate this year, and a further 75bp easing in 2026.” The Advanced Goods Trade balance saw the deficit widen to 103.6 billion from a deficit of 84.85 billion, much wider than the 89.45 billion forecast. Looking within the report, July exports were USD 178.0 billion, USD 0.1 billion less than June exports. Imports of goods for July were USD 281.5 billion, USD 18.6 billion more than June imports. Given that the deficit increase is led by a jump in imports, it could have negative implications for GDP, as imports are a subtraction in the calculation of GDP. The rise in imports was led by a 25.4% increase in industrial supplies and an 11.5% increase in other goods. On the report, OxEco suggest the trade data creates downside risk to Q3 GDP, noting the increase in capital goods imports may reflect ongoing spending by businesses on high-tech goods associated with AI, but it may also be in response to looming sector-specific tariffs. Fed Governor Waller reiterated his dovish views in a more confident manner on Friday, saying he would support a 25bps rate cut at the September meeting, anticipating future cuts over the next 3-6 months. This is an unsurprising development in the governors’ views, given he previously said before the July NFP report (which saw large downward revisions), “while the labor market looks fine on the surface, once we account for expected data revisions, private-sector payroll growth is near stall speed, and other data suggest that the downside risks to the labor market have increased”. Waller does not believe a bigger cut in September is needed, unless the August jobs report showed a substantial weakening, with inflation staying well contained. He called the current policy rate modestly restrictive, and estimates its 1.25-1.50% above neutral (puts Waller in line with the Fed median FFR neutral estimate of 3%, but in the lower end of the 2.5-3.9% range). Similar to Powell, Waller views the downside risks to the labour market as having increased with labour demand weakening. The dovish member called tariffs a tax that does not raise inflation and added that there is no set sequence for rate cuts; they are going to get to neutral, it is just a question of how long it will take. Elsewhere, Oil closed lower by 1% while Gold was firm, ending Friday with a gain of 0.8%.
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