Two important economic data releases came out today that were divergent. Inflation in the CPI report (Consumer Price Index) was hotter than expected suggesting higher interest rates but initial jobless claims jumped up 33k suggesting lower interest rates. The bond market has mostly paid attention to the weaker initial jobless claims data with the 2-year falling 6 basis points, but I don’t think it will last.

I’ve been very focused on the fact that initial jobless claims haven’t risen to corroborate the rise in the unemployment rate but today’s data doesn’t resolve that. The effect of today’s number on the 4-week moving average is shown in the barely visible red line/dot in the chart below. This series still doesn’t show labor weakness to the extent that the unemployment rate has, and today’s numbers were skewed higher by Hurricane Helene. The higher number today will become important if it becomes a trend.

Despite three FOMC members coming out today (Williams, Goolsbee, Barkin) saying that today’s inflation report doesn’t change the overall trend of disinflation and easing posture, there is a burgeoning two-month trend of accelerating inflation in CPI as well as important subsets like supercore and shelter which are closely followed by the Fed to monitor the “last mile of inflation” (see oval in chart below).

The mid-July date that economic data began rising from (chart below), matches the date that inflation started rising (chart above) and when financial conditions started getting much easier (lower rates, higher stocks). If it gets in FOMC members’ heads that easier financial conditions have caused inflation to re-ignite, interest rate cuts will stop until that is resolved. Several Fed speakers this week sounded hawkish (Musalem, Kugler, Jefferson, Logan, and Bostic). Raphael Bostic, president of the Atlanta Fed, was interviewed by the Wall Street Journal in an article today saying that he is beginning to favor skipping a rate cut in November. In response to today’s inflation report, he said,

“This choppiness to me is along the lines of maybe we should take a pause in November. I’m definitely open to that,” Bostic said. “I think we have the ability to be patient and wait and let things play out a little longer…. There are elements of today’s report which I think validate that view.”

Don’t count on the Fed to keep cutting rates without economic weakness. I continue to expect interest rates to trend upwards until economic data shifts negatively again.