The Week Ahead: Bracing for the Fed’s Signal

This week, the economic calendar is centered on the Fed’s July FOMC rate decision, announced midweek Wednesday. While the Fed is widely expected to leave rates unchanged for the eighth consecutive meeting in a range of 5.25-5.50%, with no Summary of Economic Projections this month, investors will be looking closely at the statement and listening even closer to Chair Powell’s press conference for any indication or lean towards a rate cut in September.

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In June, the statement read no reduction would be appropriate until the Committee gains “greater confidence that inflation is moving sustainably towards 2 percent.” The June FOMC statement also noted that the “risks to achieving its employment and inflation goals have moved toward better balance over the past year.” Finally, in the June statement, the Fed highlights there has been “modest further progress toward the Committee’s 2 percent inflation objective.”

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Any indication of additional confidence in terms of inflation moving to its target or an upward adjustment in its assessment of the progress of inflation will presumably increase the odds of a September adjustment in policy, despite a pickup in activity in the second quarter, a still solid labor market, and still stubbornly elevated inflation with only two months of improvement as a backdrop.

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This morning on the economic calendar, the Dallas Fed Manufacturing Index unexpectedly fell from -15.1 to -17.5 in July, a two-month low. According to the median forecast, the index was expected to rise slightly to a reading of -14.2.

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In the details of the report, employment gained from a reading of -2.9 to +7.1 in June, the highest reading since September 2023. Also, the six-month general business outlook index increased from +12.9 to +21.6, the highest since November 2021. On the other hand, new orders plunged from a reading of -1.3 to -12.8, averaging a reading of -4.7 over the past six months. Production fell from +0.7 to -1.3, and capacity utilization dropped from -4.8 to -10.0 in July, a six-month low.

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Tomorrow, the S&P CoreLogic 20-city and national home prices indices, the May FHFA House Price Index, July consumer confidence from the Conference Board, and the June JOLTS report – or Job Openings and Labor Turnover Survey – will be released.

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Later in the week, on Wednesday, weekly mortgage applications, the July ADP employment report, the Chicago PMI, and June pending home sales.

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On Thursday, weekly jobless claims, nonfarm productivity and unit labor costs for the second quarter, the final July print of the S&P Global U.S. Manufacturing Index, and the ISM Manufacturing Index for July.

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In June, manufacturing activity fell for the third consecutive month to a reading of 48.5, a four-month low led by a loss of momentum in prices paid, inventories, imports and employment. In July, the ISM Manufacturing Index is expected to rise from last month’s lull, albeit still remain in contractionary territory at a potential reading of 49.0.

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On Friday, a key release of the week – the July nonfarm payrolls report. After a larger-than-expected gain of 206k in June, nonfarm payrolls are expected to rise a more muted 175k in July, potentially marking a three-month low. The three-month average, however, will potentially rise from 177k to 200k.

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The unemployment rate, meanwhile, is expected remain at 4.1% for the second consecutive month, still well below what the Fed designates as the full unemployment range, and perpetuating the notion of ongoing tight-ish labor market conditions.

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Average hourly earnings are expected to rise 0.3% in July, following a similar gain in June, potentially resulting in a 3.7% increase over the past 12 months. While still minimally robust, this would mark a decline from a 3.9% annual gain reported in June. ?

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-Lindsey Piegza, Ph.D., Chief Economist