Inflation update tests Fed doves

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Morning Bid

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By Mike Dolan, Editor-At-Large, Financial Industry and Financial Markets, Reuters Open Interest

Wall Street indexes continue to grind out new records as Federal Reserve doves push for an interest rate cut next month, but stock futures stepped back ahead of today's bell as inflation and trade updates were awaited and the Fed board row intensified.

Just before the long Labor Day weekend, the July reading on the Fed's favored inflation gauge - the personal consumption expenditures (PCE) measure - is due for release on Friday along with goods trade data for the same month. Annual core PCE inflation is expected to have ticked up to 2.9%, although it will arguably be overshadowed by the more sensitive August payrolls report next week.

Chiming with White House demands, dovish Fed board governor Chistopher Waller - tipped by many to be the next Fed Chair - said that rates needed to be cut next month and that if August jobs and inflation readouts were soft enough then more than a quarter point reduction may be warranted. There was little to support that from Thursday's data at least, with Q2 GDP revised up to show 3.3% growth and weekly jobless claims ebbing. Fed futures price an 84% chance of a quarter point cut in September, with 55 basis points of cuts pencilled in by yearend. Treasury yields backed up slightly from Thursday's lows and the dollar firmed a touch.
Waller's Fed board colleague Lisa Cook filed a lawsuit on Thursday claiming President Donald Trump has no power to remove her from office, setting up a legal battle that could challenge long-established norms for the U.S. central bank's independence. Cook also sought an injunction that declares Trump's effort to fire her is unlawful and seeks to bar the Fed from taking steps to remove her pending further litigation. A hearing on the motion is set for 1000 EDT on Friday. If successful, it would allow Cook - who has always voted in step with the majority of Fed governors - to take part in September's policy meeting.
Elsewhere, the U.S. tariff exemption for package shipments valued under $800 ended on Friday, raising costs and disrupting supply chain models for e-commerce companies, small businesses using online marketplaces and consumers. The European Commission, meanwhile, proposed removing duties on imported U.S. industrial goods in return for reduced U.S. tariffs on European cars. China stocks outperformed and were on course for their biggest monthly gain in almost a year, despite a pullback in its red-hot tech sector and a cooling of the yuan from 2025 highs. British banks fell 3-5% after a UK think tank recommended the government tax banks on the billions of pounds they receive in interest from the Bank of England on the reserves.

It's Friday, so today I'll offer you some weekend reading suggestions away from the headlines.

I'll be back with your Morning Bid on Tuesday, September 2.

I'd love to hear from you, so please reach out to me at mike.dolan@thomsonreuters.com.

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Today's Market Minute

The U.S. tariff exemption for package shipments valued under $800 ended on Friday, raising costs and disrupting supply chain models for e-commerce companies, small businesses using online marketplaces and consumers alike.
The Indian rupee hit a record low on Friday, slipping past the 88-per-dollar mark for the first time ever, as investors said the drag from punitive U.S. tariffs on Indian goods will hurt the country's growth and external finances.
Thailand's Paetongtarn Shinawatra has been dismissed as prime minister by the Constitutional Court for a violation of ethics after only a year in power, plunging the country and its stuttering economy into more uncertainty.
Amid the Federal Reserve drama and deluge of corporate earnings in August, one clear but overlooked trend emerged in U.S. equities: the rotation out of expensive tech stocks and into cheaper small caps. As the month draws to a close, ROI markets columnist Jamie McGeever writes, the big question is whether this can continue.
The world is going to need a lot of copper and other critical metals if it is going to pivot away from fossil fuels. But, ROI metals columnist Andy Home asks: can the mining industry deliver?

Weekend reading suggestions

Here are some articles away from the day-to-day headlines that you may find interesting.

OVERHEATING OR SKEW?: U.S. Census Bureau numbers showing 2.2 million fewer foreign-born adults in July versus January are "almost certainly wrong", argues Peterson Institute fellow Jed Kolko, adding they are either incorrect or suggest a ludicrously overheated labor market with a jobless rate as low as 2.6%. Kolko explains that some or most of the decline is probably because immigrants are increasingly wary of responding to government surveys. The drop in immigrants is still very real and large - just not that large, he concludes.
LOWER JOBS BREAKEVEN: Falling net migration has likely cut by two thirds the 'breakeven' monthly payroll benchmark - the number of jobs the economy needs to add to keep the jobless rate steady, reckons St. Louis Fed economist Alexander Bick. Data from the last three months suggests a breakeven below 50,000 and if employment growth is revised downward again when the August jobs report is released on Sept 5, "it would support the low end of our estimate range - 32,000 jobs - being closer to the mark".
TRUST EROSION AND HAWKISH CUT: Former Fed Vice Chair Roger Ferguson says the Trump administration's attempt to remove Lisa Cook from the Fed board risks eroding trust in the central bank's autonomy, which undermines the dollar as a reserve currency and America's ability to service its debts. However, the most likely scenario for the September Fed policy meeting is a single 'hawkish cut' followed by a pause for the rest of the year, Ferguson wrote for the Council on Foreign Relations.
'STABLECOIN PARADOX': Digital currencies pegged to fiat money face built-in tensions between credibility and competition, creating a 'stablecoin paradox', argue Eduardo Levy Yeyati and Sebastian Katz in column for CEPR's VoxEU. Pointing out that currency boards and hard pegs repeatedly failed under such pressure in the past, the 'paradox' is no longer abstract - it's the reality of a digital currency arms race between the two largest economies. The winner will be the system that can best resist erosion of its monetary discipline. America's test is how strict reserves can survive market incentives for growth while China is testing whether centralization can survive competitive pressures for private innovation. Both face the same trade-off: "stability requires discipline, but growth demands elasticity".
'LAND SWAP' THAT WASN'T: Shortly after meeting Vladimir Putin in Moscow on August 6, U.S. envoy Steve Witkoff delivered major news to Donald Trump: The Russian president was prepared to offer significant territorial concessions to end his war in Ukraine. Witkoff's readout to the U.S. President prompted Trump to hail his emissary's "great progress" and announce a historic summit with Putin - indicating a land swap was on the table. But the diplomatic drive descended into confusion and the summit went nowhere. Reuters Gram Slattery, Jonathan Landay and Andreas Rinke report on what happened.

Today's key chart

Graphics are provided by Reuters.

The U.S. tariff exemption for package shipments valued under $800 ended on Friday. The U.S. Customs and Border Protection agency began collecting normal duty rates on all global parcel imports, regardless of value, country of origin, or mode of transportation at 12:01 a.m. EDT on Friday. It offered a flat-rate duty option of $80 to $200 per package shipped from foreign postal agencies for six months.

The move broadens the Trump administration's cancellation of the 'de minimis' exemption for packages from China and Hong Kong in May as part of an effort to halt shipments of fentanyl and its precursor chemicals into the U.S. The de minimis exemption has been in place since 1938, starting at $5 for gift imports and was raised from $200 to $800 in 2015 to foster small business growth in e-commerce markets.

Today's events to watch

U.S. July personal consumption expenditures inflation (PCE) guage, July personal income/consumption (8:30 AM EDT) July goods trade balance (8:30 AM EDT) July retail/wholesale inventories (8:30 AM EDT), University of Michigan final August consumer survey; Canada Q2 GDP revision (8:30 AM EDT)

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