Inflation update tests Fed doves

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 Christopher 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.

Meanwhile, 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. A hearing on the motion is set for 1000 EDT on Friday.

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. The European Commission proposed removing duties on imported U.S. industrial goods in return for reduced U.S. tariffs on European cars. China stocks outperformed, and British banks fell 3-5% after a UK think tank recommended a new tax on bank reserves.

Today's Market Minute

In global markets, the U.S. tariff exemption for package shipments valued under $800 ended on Friday, raising costs for consumers and businesses. The Indian rupee hit a record low, slipping past the 88-per-dollar mark for the first time ever, hurt by concerns over U.S. tariffs. In Thailand, Paetongtarn Shinawatra has been dismissed as prime minister by the Constitutional Court, plunging the country into more uncertainty. Amid the Federal Reserve drama, an overlooked trend emerged in U.S. equities: the rotation out of expensive tech stocks and into cheaper small caps. Finally, as the world pivots away from fossil fuels, the question is whether the mining industry can deliver the necessary copper and other critical metals.

Weekend ReadsOVERHEATING OR SKEW?Peterson Institute fellow Jed Kolko argues that U.S. Census Bureau numbers showing 2.2 million fewer foreign-born adults are "almost certainly wrong." LOWER JOBS BREAKEVEN St. Louis Fed economist Alexander Bick reckons falling net migration has likely cut the 'breakeven' monthly payroll benchmark needed to keep the jobless rate steady to as low as 32,000. TRUST EROSION AND HAWKISH CUTFormer Fed Vice Chair Roger Ferguson says the attempt to remove Lisa Cook from the Fed board risks eroding trust in the central bank's autonomy. 'STABLECOIN PARADOX'A column for CEPR's VoxEU argues that digital currencies pegged to fiat money face built-in tensions between credibility and competition. Finally, 'LAND SWAP' THAT WASN'TReuters reports on how a potential territorial concession from Russia to end the war in Ukraine descended into confusion.

Chart of the Day

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.

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 and was raised from $200 to $800 in 2015 to foster small business growth in e-commerce markets.

Today's Events to Watch

On the economic calendar, events to watch include the U.S. July personal consumption expenditures (PCE) inflation gauge, July personal income and consumption data, the July goods trade balance, and July retail/wholesale inventories, all due at 8:30 AM EDT. Also scheduled for release are the University of Michigan's final August consumer survey and Canada's Q2 GDP revision.