MNI US Macro Weekly: One Week, Two Labor Days

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EXECUTIVE SUMMARY

A busy pre-holiday week for data brought mixed economic signals and little net change in Fed easing expectations, putting next week’s labor day – Friday with its nonfarm payrolls report, of course, with apologies to Monday’s federal holiday – in focus for the FOMC and market participants alike.

• Second-quarter GDP was revised up by more than expected in the second reading, to 3.3% Q/Q SAAR, driven by better-than-previously estimated domestic demand but still leaving 1st half growth in slightly weaker territory vs last year. That said, the Atlanta Fed's Q3 GDPNow estimate jumped to 3.47% (though the implied contribution from net exports in the quarter looks somewhat dubious, as we explain).
• The other major release of the week was July's Personal Income and Outlays report, which showed a modest uptick in income and spending on the month. However, the broader trends remain mixed at best, as real disposable income growth remains soft and services consumption is failing to regain traction.
• Core PCE inflation was close to expectations in July as the Y/Y accelerated to 2.9% for its fastest since February as it moves further away from recent lows of 2.6% having stalled above the 2% target. Recent trend rates are a little hotter but the median FOMC member will still need to see a further acceleration to meet their 4Q25 forecasts from June.
• Labor data were mixed. Latest jobless claims were in line to slightly better than expected, with initial claims trending a little higher but still impressively low whilst continuing claims are broadly plateauing after sharper increases in 1H25. But within the Conference Board consumer survey, the labor differential edged lower again, suggesting a continued upward trend in the unemployment rate.
• Elsewhere: regional Fed activity surveys were individually mixed, but combined generally showed an improvement in both manufacturing and services activity albeit with continued upside price pressures.
• Consumer sentiment (UMichigan and Conference Board surveys) and housing activity remained soft.
• Apart from Gov Waller again making the case from rate cuts, other FOMC colleagues who commented this week were a little more guarded when it came to the need for easing, to our ear.
• Overall, the week’s data and speakers didn’t move the needle much on Fed cut pricing, which still envisages a 25bp September cut (nearly 90% implied), with 56bp of cuts through end-year (a cumulatively priced second cut in December) and 83bp through March 2026 (3+ cuts).
• The next major catalyst for rates will be Friday’s employment report for August which will be watched extremely closely after last month’s weak July report subsequently set the tone for price action. Bloomberg consensus currently looks for nonfarm payrolls growth of 75k, very similar to the 73k in July, but with those two-month revisions also in focus.
• In Fed commentary, we will hear from Board Governor nominee Stephen Miran in his congressional nomination hearing, as well as Musalem, Williams, and Kashkari. We also get the latest Beige Book.