BlueBay Senior Trader Peter Keenan highlights key themes following the most recent inflation data release.
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Welcome back to The Weekly Fix. My name is Peter Keenan, and I am a senior trader on RBC’s BlueBay leveraged finance team located in Stamford, Connecticut.
On the morning of Tuesday, August 12th, the Bureau of Labor Statistics released July’s Consumer Price Index data. CPI, as it is referred to, increased by 0.20% on a headline basis month over month, in line with the survey median. Excluding food and energy, CPI increased by 0.30% month over month, also in line with the survey median. The year over year readings rose to 2.7% on a headline basis, and 3.1% excluding food and energy, basically in line with the survey medians of 2.8% and 3.0%.
Drilling down into the data, we see that goods inflation was weaker than expected in this report, which is a signal that tariff related costs are not being passed onto the consumer. However, this was offset by a stronger reading in services, with airfare up 4% month over month, after a decline in the last five readings. Medical services also rose 0.8% month over month.
So, what does this reading mean for markets and the Fed’s rate decision? There is no FOMC meeting for the month of August, but the annual Jackson Hole Economic Policy Symposium takes place between August 21st and 23rd. At last year’s event, Federal Reserve Chair Jerome Powell indicated that monetary policy should shift toward potential rate cuts. At the September 2024 meeting, the Fed cut rates by 50 bps, and then by 25 bps in both November and December. We expect this year’s Jackson Hole meeting to offer an opportunity for Powell to again nod towards monetary easing.
While there are some hot spots in this month’s inflation reading, it’s probably not enough to deter the doves on the committee. Markets are now pricing a 96% chance of a 25 bps rate cut in September, up from 86% before the reading. This is consistent with our base case view that the Fed will cut 1 to 2 times this year. While we have flagged a slowing pace of activity below 2% in the second half of 2025, deregulation and policy easing could point towards a more upbeat outlook for the economy as we move through 2026. Corporate earnings so far have failed to provide naysayers with evidence suggesting that there is deep trouble ahead.
Thanks for joining this week’s edition of the Weekly Fix. Enjoy the rest of your summer and see you next time.
Key points
Inflation Data Overview: July's Consumer Price Index (CPI) rose 0.2% month-over-month (headline) and 0.3% excluding food and energy, with year-over-year increases of 2.7% (headline) and 3.1% (core), aligning with expectations.
Market and Fed Expectations: Markets now price a 96% chance of a 25 bps rate cut in September, up from 86% pre-CPI release. The Jackson Hole Symposium (Aug 21-23) is expected to signal further monetary easing, consistent with the Fed's potential 1-2 rate cuts this year.
Economic Outlook: Despite a slowing pace of activity below 2% in late 2025, deregulation and policy easing may support economic growth into 2026. Corporate earnings have remained resilient, countering concerns of deeper economic trouble.