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The stocks are mixed in early trading, pulling back from last week's late rally after weaker than expected jobless claims helped reassure investors that maybe the economy isn't heading for a recession. But the market, though, clearly still on edge, and key data points on inflation and retail sales this week are going to give investors potentially a better idea of the Fed's next move. So here to talk about that and more, we want to bring in Thomas Simons. He is Jeffrey's senior US economist. And Thomas, it's great to have you here on set with us. Thank you so much.

Great to be here. Thank you.

So let's talk about what is going to be a busy week here, at least on the econ front, when you take a look at the inflation prints, take a look at retail sales. What's the most important print to you this week and why?

So very close race between CPI and retail sales obviously, but I think for once, and and this may be a recurring theme amongst commentators here, retail sales actually edges out CPI a little bit, um, because we're so kind of keyed off on whether or not we're going to continue to see strength from the consumer, whether or not that's going to drive growth on a on a sustained basis, right? Uh, the risk is though that, you know, we have to remember exactly what retail sales are telling us, right, which is mostly about goods spending, which since 2021 has been quite quite weak, right? Also, uh, as it relates to, you know, the kind of breakdown of different types of consumers on the income spectrum, upper income spenders seem to be driving overall growth and most of their spending seems to be focused on services. So it's possible that we get a little bit of a weaker head fake with this data. Um, I'm expecting it's going to be relatively soft outside of autos rebound from last month when the cyber attack screwed things up with June. Uh, but in in July, I'm expecting we're going to see a pretty decent headline, but uh, probably some softer details under the hood.

Are those softer details under the hood something that you think will drive the Fed more moving forward? Or do you think it's still about that super core number?

Um, you know, I think that the Fed is positioned to, you know, likely cut at the next meeting, and I don't think that they're particularly keen on going big and and bold or, you know, certainly not going intermeeting like we were talking about early last week. Uh, but, you know, I mean, it'll it'll definitely add some some credence to the idea that they should be withdrawing on uh, on the restriction that's on the economy.

What do you think the pace of cuts is going to look like? And and then I guess ultimately, what does that then tell us about maybe this overreaction that we clearly saw play out in the markets last week?

Right. So, I mean, I've always been kind of on the more conservative side with thinking about the Fed and and I just try to kind of trust what their guidance is specific to this, and you know, they have a relatively shallow path that's in the last SEP. Granted, we've gotten a lot of more information about the economy since June, uh, and we're going to get an interesting update on this, uh, in a few weeks at the next meeting. But uh, I think maybe they go twice this year, 25 basis points a piece, and then I'm only expecting at this point maybe 50 basis points of cuts in each of the next two years as well. I think the Fed needs to be very, very careful about, you know, understanding that rate cuts could spark some significant demand in areas that are interest rate sensitive, right? So for instance, housing. Uh, last October after Powell said that they weren't going to raise rates anymore, that was essentially the bottom of the housing market, right? We had this little correction in prices that began last spring, literally ended in October, and prices have been up every month since. So that's only with them saying they're not going to raise rates anymore. If they actually start cutting them, and then expectations start to get built in, and mortgage rates drop, you know, another 100, 25, 150 basis points, you could see shelter rise quite a bit, and of course, as we look at the inflation data recently, shelter has been one of the bigger drivers of disinflation. So you kind of eliminate that, that they're in a tough spot.

Given that, if we do see more cuts than your call calls for in in that time period, would that be indicative to you of some sort of sickness within the economy that the Fed was working to address?

Yes, it would. Uh, you know, my view is more the more or less that the economy is still in pretty decent shape overall. You know, certain sectors are doing a little worse than others, um, you know, certainly manufacturing and and housing too. Um, they will probably do a little bit better with modest rate cuts, uh, but you know, this is about maintaining a balance and trying to make sure that inflation doesn't get away from their control once again, right? I mean, we've been been in this spot not that long ago. So if things are starting to unravel in some way, or labor market's starting to do quite a bit worse, then I would be very happy to pencil in more cuts. You know, they certainly have a lot of room to to provide some accommodation. It's just that, you know, at this point I'm I'm as data dependent as they are, so uh, I'm willing to to change, but not not just yet.

Thomas, what is your assessment of the labor market? Because we did see a weakening when you take a look at the July print, when you take a look at jobless claims that helped reassure the markets last week. Have some of those concerns about weakness, has that been a bit overdone, and what are some of those key factors that you're looking for?

So I don't necessarily think that the that, you know, monitoring weakness is necessarily overdone. Uh, we do seem to be kind of at the top of the cycle for for the labor market. It's just a question of how quickly it's going to unravel, right? I mean, like certainly a lot of talk about the Sahm rule last week, and and, you know, how we we've seen the unemployment rates excuse me, unemployment rate rise quite a bit from the the trough, but so far things haven't really accelerated in a way that's particularly troubling. Um, and labor market data, as it's softening, is is really showing the market coming into better balance, right? I've been looking at some data for several months, thinking you can kind of characterize the labor market as no hire, no fire, um, which is not great if you are entering the labor market, but is not the worst if you are currently in the labor market. So, um, you know, for now, until financial accommodation, or financial conditions ease some more, uh, I think that that's very likely what we're going to continue to see from businesses. It's just a very cautious approach to adding to payrolls, but also mindful that it took a lot of effort and a lot of money and excess investment in order to hire the people that they currently have.

Really quickly here, are you seeing evidence of the low-income consumer weakness that we've been talking about? Are you seeing evidence of that creeping up into middle and higher income consumers? And I referenced that particularly as we're ahead of some big box earnings this week as well.

Yeah, um, I mean, it's it's interesting because we we all seem to kind of have this good idea about the dichotomy of upper income and lower income folks, but there's very little data that actually supports it. So it's mostly news stories and anecdotal reports that we're kind of going on, and uh, up until last week I would have said no, I think that, you know, mostly upper and middle income folks are doing fine. Uh, I think if we start to see some more weakness in the labor market, I would start to worry about that the middle class. Uh, but, you know, there were some stories last week about, um, you know, some weakness, uh, in the travel and entertainment leisure sector, right? Like, you know, a lot of places are kind of, uh, year on year is a tough comp because last year was really, really strong, but they are softer, uh, you know, seeing softer attendance and softer spending. So to me, you know, especially as we see the overall consumer sector driven by, you know, as I said, upper income earners, kind of, you know, living it up with with services, uh, if they're starting to pull back, then that's uh, you know, quite worrying for the overall kind of aggregate spending numbers.

All right, Thomas, well thank you so much as always for coming in. We always appreciate you coming here. Thank you so much. Again, Thomas Simons, Jeffrey's senior US economist.

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