Inflation, trade, and natural disasters shape the Fed’s uncertain path

Trade deficit

Trade deficit data was released on Tuesday, with August exports at $271.80B and imports at $342.20B. Exports increased by $5.30B from July, while imports fell by $3.20B, resulting in an overall deficit of $70.40B. The data coming in from August suggests that trade may have a minimal impact on economic growth. Carl Weinberg, Chief Economist at High Frequency Economics, mentioned, “Putting together July and August figures suggests that net trade is flat so far in the third quarter, making no significant addition or subtraction to GDP growth so far.” Despite the $3.20B drop in imports, the Federal Reserve (Fed) cutting its benchmark rate by 50 basis points will not keep imports low for long. Matthew Martin, Senior U.S. Economist at Oxford Economics, said, "Depleted inventories and resilient consumer demand indicate the drop in imports is unlikely to be sustained."

Jobless claims boosted by Hurricane Helene

Jobless claims rose by 33,000 to 258,000 in the week of October 5, well above the projected amount of 230,000. This marks the highest number of weekly unemployment claims since August of 2023. States impacted by Hurricane Helene saw the most significant increases, with the effect of Hurricane Milton expected to be felt in the coming weeks.

Inflation higher than expected in September

In September, the Consumer Price Index (CPI) rose faster than expected, moving up by 0.20%, surpassing the expected 0.10% increase. Core CPI, the Fed’s preferred inflation prediction metric that excludes food and energy, rose by 0.30%, higher than the 0.20% forecast. After this data release on Thursday morning, stocks dropped in the afternoon, halting a rally that brought major indexes to record highs.

Despite the higher-than-expected changes in CPI and its core counterpart, the Fed is widely expected to continue cutting rates. However, this new data raised questions about how quickly and by how much the Fed should continue to cut rates through the end of 2024. Last month, when the Fed voted to cut rates by 50 basis points, Fed Governor Michelle Bowman expressed concern that a rate cut of that size could signal economic weakness. With no clear signs of weakening or fragility, Bowman felt it would have been better to cut rates by 25 basis points. Atlanta Fed President Raphael Bostic told the Wall Street Journal that he was comfortable holding rates steady next month and predicts only one more rate cut this year. Among inflation, the looming election, natural disasters, and labor strikes will factor into the decision of whether to cut rates next month. On Thursday, the yield on the 10-year Treasury note edged up to 4.077% after topping 4.11% earlier in the session.

PPI and Core PPI remain relatively flat

The Producer Price Index (PPI), a measure of what producers receive for their goods and services, remained flat for the month of September and increased by 1.80% from one year ago. While Core PPI met expectations, increasing by 0.20% and 2.80% from a year ago, the unchanged measure of wholesale prices points to a continued easing of inflation. The immediate market reaction was muted, with futures moving marginally higher on Wall Street while Treasury yields rose on longer-duration securities. All three major indexes were on track to notching their fifth consecutive week of gains, which would be the best winning streak for the Dow Jones Industrial Average (DOW) in eight months and best for the Nasdaq since May.

The week ahead

This week brings the Import Price Index data release for September and commentary from Fed Governors Christopher Waller and Adriana Kugler.