Price Rebound Deviates from Inflation Target, September Rate Cut Expectations Face Real-World Challenges

Summary:

The day after the Federal Reserve's non-unanimous decision to stand pat on interest rates, a cavalcade of economic indicators appears to suggest not moving was the right move.

Key points:

● S&P 500, Nasdaq advance, but off highs; Dow ~flat

● Comm Svcs lead S&P sector gainers; Healthcare weakest group

● Euro STOXX 600 index off ~0.7%

● Dollar, gold rise; bitcoin up ~1%; crude declines >1.5%

● US 10-Year Treasury yield falls to ~4.34%

The day after the Federal Reserve's non-unanimous decision to stand pat on interest rates, a cavalcade of economic indicators appears to suggest not moving was the right move.

The PCE price index, Powell & Co's pet inflation yardstick, showed inflation gathering some heat.

Headline and core (ex. food and energy) prices both rose by 0.3% last month, hitting the consensus nail on the head. Both marked a slight acceleration from May's 0.2% increases.

But prices rose 2.6% year-over-year, and the core figure posted an annual gain of 2.8%. Both were 10 basis points hotter than expected.

But stripping away volatile food and energy prices, core PCE rose on monthly and annual bases by 0.2% and 2.7%, respectively. Both numbers were 0.1 percentage points hotter than expected.

Taken together, they appear to justify the Fed's holding pattern as prices, increasingly waylaid by tariffs, struggle to bridge that troublesome last mile to the Fed's average 2% inflation target.

"The Fed is unlikely to welcome the inflation dynamics currently taking hold," writes Olu Sonola, head of economic research at Fitch Ratings. "Rather than converging toward target, inflation is now clearly diverging from it."

"This trajectory is likely to complicate current expectations for a rate cut in September or October," Sonola adds.

Elsewhere in the report, personal income rose by 0.3%, stronger than the 0.2% analysts expected and marking a partial bounce-back from May's 0.4% decrease.

Consumer spending, the tent pole of the U.S. economy, increased by 0.3%, weaker than the 0.4% gain economists predicted. And even then, the increase reflects price increases, particularly with respect to gasoline.

"Consumer spending rose decently in June, but that mostly just kept spending in line with price increases," says Bill Adams, chief economist at Comerica Bank. "After a larger decline in May, consumer spending in June was below April’s level."

Drilling down, consumers continued to rein in their expenditures on durable goods, which dipped 0.5%, while spending on non-durables and services increased by 0.4% and 0.1%, respectively.

Disposable income was unchanged, which helped hold the saving rate - or the unspent portion of disposable income - at 4.5%.

The saving rate is often viewed as a barometer of consumer anxiety.

Last week, 218,000 U.S. workers joined the queue outside the unemployment office USJOB=ECI, or 1,000 more than the previous week and 2.7% shy of consensus.

The underlying trend, as expressed by the four-week moving average of initial claims, now has a slight downward bias, suggesting that layoffs are on the wane.

But don't tell that to Challenger, Gray & Christmas (CGC). The executive outplacement firm's planned layoffs report USCHAL=ECI showed that in July, corporate America announced it would lay off 62,075 workers, or a 29.3% increase from June and 140% more than a year ago.

From January through July, 806,383 job cuts have been announced. That's 75% more than the 460,530 announced in the first five months of last year.

So far this year, the government - largely as a result of billionaire Elon Musk's DOGE efforts - has cut 292,294 jobs. That's 36.2% of total year-to-date layoffs.

"We are seeing the Federal budget cuts implemented by DOGE impact non-profits and healthcare in addition to the government," says Andrew Challenger, labor expert at CGC. "AI was cited for over 10,000 cuts last month, and tariff concerns have impacted nearly 6,000 jobs this year."

Ongoing jobless claims USJOBN=ECI, reported on a one-week lag, essentially held firm at 1.946 million, or 9,000 fewer than analysts expected. The number remains elevated and supports recent consumer survey data suggesting laid off workers are finding it increasingly difficult to find a replacement gig.

"Continued claims are still elevated, signaling unemployed workers are finding it difficult to find new jobs, but are showing signs of leveling off," says Nancy Vanden Houten, lead economist at Oxford Economics.

Separately, the Labor Department released its employment cost index USEMPC=ECI, which rose by 0.9% in the second quarter on a quarterly annualized basis, hotter than the 0.8% analysts anticipated and a repeat of the Q1 growth rate.

All of which is prologue to the Labor Department's July employment report due on Friday, which is expected to show the U.S. economy added 110,000 jobs this month, with the unemployment rate creeping up to 4.2% from 4.1%.

Finally, Midwest factory activity has continued to contract in July, but at a shallower-than-expected pace.

MNI Indicators' Chicago purchasing managers' index (PMI) USCPMI=ECI delivered a reading of 47.1, a 6.7-point improvement over June and not quite as gloomy as the 42.0 analysts anticipated.

Still, a PMI reading south of 50 indicates monthly contraction.

Market participants will get a clearer picture of the state of U.S. manufacturing on Friday, when the Institute for Supply Management (ISM) releases its nationwide PMI.

Analysts see that report improving to a barely-contractive but much healthier 49.5.

Source: Reuters

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Henry Thompson

Japan's manufacturing activity shrank in July after briefly stabilising in the previous month as weak demand pulled production back into contraction, a private sector survey showed on Friday.

The S&P Global Japan manufacturing purchasing managers' index (PMI) fell to 48.9 in July from 50.1 in June, dropping below the 50.0 threshold that separates growth from contraction. The PMI was little changed from the flash reading of 48.8.

Most of the survey data was collected before the announcement of a Japan-U.S. trade agreement last week, which lowers tariffs imposed on Japan to 15% from a previously threatened 25%.

As the trade deal with Washington kicks in, "it will be important to see if this will translate into greater client confidence and improved sales in the months ahead," said Annabel Fiddes, economics associate director at S&P Global Market Intelligence, which compiles the survey.

The key sub-index of output fell back into contraction and at the sharpest pace since March. Companies widely reported reducing production due to lower volumes of new business, according to the survey.

New orders shrank again in July, though at a slightly slower pace than in June.

Despite falling production and orders, manufacturers continued to increase staffing in July, though the pace of job creation slowed to a three-month low.

On the price front, input cost inflation eased to its lowest in four-and-a-half years, while output prices rose at the fastest rate in a year as firms passed on higher costs to customers.

Business confidence improved to a six-month high in July, with firms expecting improved demand conditions and reduced trade-related uncertainty to support growth over the next year.

Source: Yahoo Finance

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Nathaniel Wright

South Korea's factory activity contracted for the sixth straight month in July, as uncertainty over U.S. tariffs weighed on output and orders, a business survey showed on Friday.

The Purchasing Managers Index (PMI) for manufacturers in Asia's fourth-largest economy, released by S&P Global, fell to 48.0 in July, from 48.7 in June.

The index has stayed below the 50-mark, which separates expansion from contraction, since February.

"July PMI data signalled that the South Korean manufacturing sector experienced a stronger deterioration in operating conditions," said Usamah Bhatti, economist at S&P Global Market Intelligence.

"Both production volumes and new orders fell at a steeper rate than that in June, with anecdotal evidence indicating that weakness in the domestic economy was compounded by the impacts of U.S. tariff policy."

The survey was conducted from July 10 to July 23, before South Korea reached on Wednesday a trade deal with the U.S. lowering tariffs to 15% from a threatened 25%.

In July, output and new orders fell at steeper rates than the month before, although the decline in new export orders contracted at the mildest rate in four months, sub-indexes showed.

Anecdotal evidence pointed to declining export order volumes in the U.S. and Japan in particular, according to the survey.

South Korean manufacturers turned pessimistic about the outlook for the year ahead for the first time in three months, citing concerns over the timing of a domestic economic recovery and ongoing uncertainty surrounding U.S. tariff policy.

Source: Yahoo Finance

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James Whitman

Economic

President Donald Trump will impose a 39% levy on imports from Switzerland, according to an executive order he signed Thursday night.

Switzerland was among the countries that have not yet finalized trade frameworks with the US before the Aug. 1 deadline for so-called reciprocal tariff rates to take effect.

The outcome is higher than the 31% tariff rate Trump initially threatened to levy in April when he unveiled duties on dozens of trading partners, only to hold off to allow time for negotiations. That negotiating period was set to end earlier in July and was extended again to August as Trump only secured a handful of agreements.

The rate on Swiss exports to the US is markedly higher than other trading partners who were able to negotiate frameworks with the US, such as the European Union, Japan and South Korea receiving 15% levies.

Trump in his second term has carried out a sweeping tariff agenda aimed at pressuring countries and industries to reshore manufacturing in the US and to reduce global trade imbalances. The US had a $38 billion trade deficit with Switzerland last year, just outside a ranking of top 10 trading shortfalls.

The country had been a priority in international negotiations and had hoped to be among the first to clinch a deal.

The impact of additional tariffs Trump has threatened on the pharmaceutical industry remain uncertain. The Swiss economy rests on large contributions from industry giants Novartis AG and Roche Holding AG.

Trump’s tariff rate comes despite months of high-stakes diplomacy intended to complete an agreement, negotiations that forced Bern to balance its commitment to global openness against the protection of domestic agriculture. The industry represents less than 1% of the economy but commands out-sized political influence, and farmers’ lobbyists had threatened to fight any settlement affecting Swiss high-tariff barriers in the area.

Trump’s April 2 tariff announcement had put Switzerland’s exporters in a double bind as it also caused a sharp Swiss franc appreciation. That prompted the Swiss National Bank to cut interest rates to zero after it had previously signaled it was done with easing.

President and Finance Minister Karin Keller-Sutter expressed careful optimism at the end of June that the nation would be able to secure a deal, saying American officials had accepted that Switzerland doesn’t manipulate its currency. During Trump’s first term, the Treasury Department had put the country on a list of jurisdictions it accused of doing so.

Source: Bloomberg

To stay updated on all economic events of today, please check out our Economic calendar

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Manuel

Cryptocurrency

Stocks

Michael Saylor isn’t backing down. The Strategy co-founder is preparing to sell $4.2 billion more in preferred stock to fuel his latest Bitcoin bet — while throwing a lifeline to investors worried he’s diluting them into oblivion.

The plan, unveiled with second-quarter earnings on Thursday, is Saylor’s latest answer to the big question hanging over his stock: how long can he keep using a lofty premium to fund ever-larger Bitcoin buys?

To reassure shareholders, Strategy pledged it won’t issue new common shares at less than 2.5 times its net asset value, except to cover debt interest or preferred dividends. At the same time, Saylor will keep tapping the market “opportunistically” when the premium is high, turning equity sales into fresh Bitcoin buys.

The move does two things at once: it locks in a floor aimed at reassuring any skeptical shareholders and arms the company with a larger war chest to keep buying Bitcoin. It’s a double play that pits Saylor directly against hedge fund managers like Jim Chanos, who have been betting the company’s premium will collapse.

“That would put common shareholders who are concerned about potential dilution at ease,” said Brian Dobson, managing director for Disruptive Technology Equity Research at the brokerage firm Clear Street. “The market is reacting positively to Strategy’s equity products. The demand is there as evidenced by their substantial capital raises.”

It’s the latest in a string of financial maneuvers that have transformed a once-obscure software firm into a leveraged Bitcoin proxy.

The dual move showcases Saylor’s mastery of capital markets during these bullish digital-asset times: using a self-imposed floor to placate critics, while simultaneously arming the company with fresh ammunition to keep buying Bitcoin.

The company - which is known formally as MicroStrategy Inc. — has already raised more than $10 billion this year through stock and structured offerings, feeding a balance sheet now holding $74 billion in Bitcoin. Its stock has surged 3,300% since Saylor’s first crypto purchase, outpacing Bitcoin itself and forcing hedge funds into a high-stakes battle over whether his premium-fueled strategy can last.

Since Strategy’s first Bitcoin purchase in 2020, Saylor has sold equity, issued various types of debt and layered stacks of preferred shares on top. In the process, he has encouraged a fleet of imitators and spurred a new industry of public companies following a so-called treasury strategy dedicated to buying and holding cryptocurrencies.

Good Times

Since Strategy trades so far above the value of its Bitcoin, the company can sell stock at rich levels, buy more Bitcoin, and in turn reinforce that premium. It’s a reflexive loop that critics warn would snap if sentiment shifts. For now, Saylor’s ability to turn equity markets into a Bitcoin funding engine has made his firm both a proxy for the cryptocurrency and a pressure point for critics betting the spread will collapse.

The company reiterated that it registered an unrealized gain of about $14 billion in the second quarter. After factoring in deferred taxes, the Bitcoin treasury company had net income of $10 billion, or $32.60 a share, the firm said in a statement. The eye-catching benefit, first disclosed at the start of the month, was due to a rebound in Bitcoin’s price and a recent accounting change.

Demand for offerings can fluctuate depending on Bitcoin prices. The firm had to sweeten one of its earlier preferred stock offerings this year with a steep discount to win over price‑sensitive buyers.

Just last week the company launched a new kind of preferred stock, dubbed Stretch, that was upsized from $500 million to more than $2 billion. It was yet another move that showed how deftly Saylor can turn financial engineering into crypto firepower. For now at least.

“Strategy’s upsize is a huge reflection on the market demand for its Stretch Preferred Stock offering,” said Tyler Evans, co-founder and chief investment officer of UTXO Management. “They have had similar upsizes from previous preferred stock offerings, but this one is an eye-popping number.”

Source: Bloomberg

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James Whitman

Economic

U.S. President Donald Trump signed an executive order on Thursday increasing tariffs on Canadian goods to 35% from 25%, the White House said.

The new rates goes into effect on August 1.

"In response to Canada's continued inaction and retaliation, President Trump has found it necessary to increase the tariff on Canada from 25% to 35% to effectively address the existing emergency," the White House said.

Source: Yahoo Finance

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Manuel

China–U.S. Trade War

Economic

US President Donald Trump said Canada has to “pay a fair rate” in order to reach a trade agreement, as US talks with Canadian Prime Minister Mark Carney go down to the wire.

“We haven’t spoken to Canada today,” the president said during an afternoon news conference at the White House. Referring to Carney, Trump said: “He’s called. And we’ll see.”

Trump again criticized Carney’s announcement that Canada plans to recognize a Palestinian state, but told reporters it’s “not a deal-breaker” in the trade talks.

The president has threatened to raise the import tax on Canadian goods to 35% by Friday, up from the current 25%, unless there’s a deal between the two nations.

Trump spoke with Mexican President Claudia Sheinbaum on Thursday morning and shortly afterward the president extended tariff rates on Mexico for 90 days to allow more time for negotiations. He had previously said he might raise them to 30% on Friday, up from 25%.

However, there’s currently a tariff exemption in place for both Canada and Mexico on goods shipped under the rules of the United States-Mexico-Canada Agreement, the accord that Trump signed in his first term. That means the majority of imports from both countries are currently tariff-free — though steel, aluminum and some other products have duties on them.

Asked what’s holding up a deal for Canada, Trump reiterated previous complaints about Canadian protectionism of its dairy industry and its history of low military spending.

“They have to pay a fair rate, that’s all. It’s very simple,” Trump said.

The US and Canada have a bilateral trade relationship worth more than $900 billion annually. The US imported $477 billion of goods and services from Canada last year and exported $441 billion, according to US Commerce Department data.

Shortly before Trump’s news conference, Commerce Secretary Howard Lutnick said on television that he doesn’t see Trump “stepping off the gas” with Canada. Lutnick said that if Carney “starts turning on the charm, and if he takes down his retaliation,” Trump could “let it down a bit.”

Carney, for his part, has said a number of times that he won’t agree to a deal that is bad for Canada.