Market Brief: Steady Inflation and Rising Jobless Claims Clear Path For More Fed Easing

Underlying consumer price growth held relatively steady in the United States last month, and initial jobless claims jumped last week, giving the Federal Reserve room—and motivation—to cut at next week’s meeting. According to data published by the Bureau of Labor Statistics this morning, the core consumer price index—with highly-volatile food and energy prices excluded—rose 0.35 percent in August, marking its highest level since January, and climbed 3.1 percent over the same period last year. This is broadly in line with consensus estimates among economists polled by the major data providers ahead of the release, but looks slightly more worrisome when assessed on a directional basis, with the 3-month annualised rate running at 3.65 percent—also the fastest since January. On a headline all-items basis, prices climbed 0.4 percent month-over-month, rising from the 0.3 percent pace set a month earlier, and were up 2.9 percent year-over-year.

Clear evidence of tariff-induced price pressures remained practically non-existent, with “supercore” services and auto-excluded core goods costs showing signs of deceleration from prior months. Taken in combination with yesterday’s unexpectedly-soft producer price index data, we think today’s numbers point to a 3-percent year-over-year increase in the Fed’s preferred inflation indicator—the core personal consumption expenditures index—when the August update is released later in the month.

Separate data showed initial applications for unemployment benefits jumping last week to the highest level in almost four years, potentially suggesting that a long-anticipated surge in layoffs may be getting underway. Initial claims rose by 27,000 to 263,000 in the week ended September 6*, while continuing claims in the prior week fell to 1.939 million from the previous 1.9 million.

On balance, these releases should reinforce expectations for a cut emerging from next week’s Fed decision, lower the likelihood of a jumbo-sized move, and enhance the chances of more easing at meetings later in the year. Treasury yields are coming down on the policy-sensitive front end of the curve but remain firm at longer durations, equity futures are almost unmoved, and the dollar is flat against its major rivals.

It’s too quiet. An admittedly simplistic measure—the gap between the effective Federal Funds rate and realised headline inflation—is holding at levels that have historically preceded blowups in the financial system, yet measures of stress have remained low for the better part of two years. Robust household balance sheets are likely playing a role; a prolonged period of deleveraging following the global financial crisis meaningfully reduced debt vulnerabilities. Elevated government spending and wealth effects stemming from the artificial intelligence boom may also be contributing factors. Nevertheless, today’s incredibly-low credit spreads, near-record equity market highs, and subdued volatility are striking.

Across the pond, the European Central Bank earlier left interest rates unchanged—as had been expected—and kept its guidance intact, reinforcing market bets on a flat policy trajectory ahead. Policymakers broadly maintained the inflation and growth forecasts set out in June, and again noted they “will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance”. The euro was virtually unmoved by the decision.

After a series of underwhelming economic data releases, traders have just 13 basis points in easing priced in over the next year, and speculative positioning on the euro itself has slipped from its early-summer highs. Although sentiment has improved from last year in line with a loosening in German fiscal constraints, the common currency bloc is still grappling with elevated levels of geopolitical and trade uncertainty, rolling funding strains in sovereign credit markets, and astonishingly-poor productivity levels. Against this backdrop, risks to policy rates are still (slightly) tilted to the downside, and—absent a violent downturn in the US—we struggle to see the exchange rate moving drastically higher.

Please note: With no major data releases on tomorrow's North American docket, the Morning Market Brief will return on Monday.

*We would suggest applying some caution to this, given that seasonal adjustment issues have long plagued August-September data.

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