Although the economic data were mixed, the theme for the month was ultimately stable growth but weak inflation. Retail sales, consumer confidence, and GDP all were positive; housing releases disappointed. Corporate earnings topped 10% for the second consecutive quarter. Most importantly, inflation has clearly remained below market expectations as well as the Federal Reserve’s 2% target.
The markets had to digest a wide range of news and events: threats from Korea, dovish Fed minutes, the action (or lack thereof) at Jackson Hole, NAFTA renegotiations, a terrible tropical storm in Houston, and another month of political controversy, along with a solar eclipse.
A core PCE deflator reading of 1.4% complicates the Federal Reserve’s policy planning. Although the Fed Governors would like to move to a normalization of monetary policy, they risk choking the recovery. As the month closes, the market is estimating a 35% chance of a rate hike by year end. The market will keep a sharp focus on inflation data.