The economic data from the last few days has been, on-balance, stronger for the economy. Q2 GDP, initial jobless claims, core durable goods, and monthly PCE core inflation have improved from their prior levels. Consumer spending was also revised up for May by 0.2% to 0.4%. Building on the positive top-tier data of core Retail Sales and Industrial Production last week, it puts some pressure towards higher yields into next week with the Fed meeting on Wednesday. My real-time economic index shows the economic data trend change in the gold circle below.

2-year yields have fallen 9 basis points this week and the 30-year none, likely because the bond market is expecting the Fed to signal some assurance of a September rate cut at their meeting next week (Wednesday.) 28 basis points of cutting has been priced in for that meeting (a little more than one 0.25% cut.) Given the stronger data, and because Powell will presumably say that the Fed doesn’t know if they are cutting in September yet, yields may rise surrounding the meeting from the lack of assurance. In the press conference, Powell will be asked several versions of  “will you be cutting at the next meeting?” and the only thing he can really say is that “we don’t know yet”, and that they need to assess the totality of the data at the next meeting. There are two jobs reports and two CPI reports to consider before then.

This is further complicated by the labor market data we get next week that is more important than any of the economic data we’ve gotten in the last two weeks. Friday is the monthly payroll report. The unemployment rate is expected to remain the same, but if it rises 0.1% to 4.2%, it will trigger the Sahm rule. This would suggest we are in a recession. Whether we are in one or not (I don’t think we are yet, because 3 of 4 coincident indicators haven’t peaked yet), this will cause the bond market to price in more cuts.