We get July PCE tomorrow (change in the personal consumption expenditures index).

Remember, the Fed’s stated measure for its 2% inflation target is headline PCE (not core PCE, not CPI).

June’s number was 2.6%, and with July CPI and PPI already reported, we should expect little change in tomorrow’s print — likely another 2.6%.  

As you can see in the chart above, we’re at the top end of this sideways range in PCE of the past year.

It’s not 2%.  But it’s a long way from the 4.33% — the effective Fed Funds rate.

That differential of roughly 1.7 percentage points between the Fed Funds rate and the inflation rate represents “restriction” — downward pressure on the economy. 

That said, the second reading in Q2 GDP just came in this morning at annual rate of +3.3%.  That’s the highest growth in more than two years.  And it’s above the long-run growth rate of 3.1%.  

So, that’s above-trend-growth even as the Fed has its foot on the brake, slowing economic activity.

And that above-trend-growth comes prior to any impact from the “big, beautiful bill” which delivers full expensing on capex and R&D — a major tailwind for investment and productivity in the second half of the year.

Let’s talk about Nvidia earnings …

As we’ve discussed for much of the past two years, data center revenue has been telling a very clear story.  There’s a supply issue.

For seven quarters, data center revenue grew at a pace of about $4 billion a quarter – as if it were fixed.  

And that put Nvidia’s growth rate on a steep downward slope, as seen here:

As we discussed last week, the annual economic symposium in Jackson Hole has historically served as a platform for central bankers to communicate important signals regarding policy adjustments. 

With that in mind, this past Friday Jerome Powell made a long speech, where he covered the evolution of the economy and monetary policy since his last speech in Jackson Hole, a year ago.

He stepped through the state of the economy, how tariff and immigration policy have affected the Fed’s outlook, and then he said this:  “the shifting balance of risks may warrant adjusting our policy stance.”

What is “shifting?”

The labor market.  

So, the Fed has gone from thinking the labor market was “in balance” — not a problem — to admitting only weeks later that it’s a recession risk.

And with that, given the Fed is in a restrictive stance (putting downward pressure on the economy), the risks in the labor market “may warrant” removing some of that restriction.

Now, this was far from the explicit signalling Powell gave last year, when he said: “the time has come for policy to adjust.” 

Nonetheless, markets responded on Friday like it was a pivot. 

Yields went down.  The dollar went down.  Stocks soared, especially the more interest rate sensitive small caps.

As we discussed earlier in the month, given the cracks in the labor market, this environment where fiscal and industrial policy has a foot on the gas pedal, while monetary policy has had a foot on the brake, is about to change.

Home Depot is a bellwether stock on the consumer, housing market health and construction/ building activity.

They reported this morning.  Let’s talk about the takeaways …

On tariffs, HD is pulling back promotions in tariffed categories while negotiating lower vendor costs elsewhere — effectively absorbing tariff pressure before it hits the customer.

That said, importantly, HD margins are holding steady.  So, they are successfully mitigating the price pressures, for the customer and the company.

As for business activity, small projects are strong.  But big projects have stalled. Debt-financed projects are on hold, because of rates.

Bottom line from HD:  The economy is steady.  Employment, wage gains and home equity are keeping homeowners spending, but big ticket items remain hostage to rates.

The resumption of the Fed easing cycle is the release valve.

Will we get a “release valve” signal on Friday?

As we’ve discussed, the annual economic symposium in Jackson Hole has historically served as a platform for central bankers to communicate important signals regarding policy adjustments.

Jerome Powell will give a prepared speech Friday morning titled, “Economic Outlook and Framework Review.”

Now, it’s possible that this could deliver the opposite of the what the market is looking for.

This “Framework Review” is a review of the Fed’s 2012 monetary policy framework, where they established the 2% inflation target.

They “reviewed” this framework in 2019-2020, where they added some flexibility that they thought they needed after dealing with the decade-long, post-GFC economic malaise (persistent low growth and low inflation, even with monetary policy at full throttle).

They thought this malaise was “the new normal.”  So, in 2020, when inflation was still sub-2%, Jerome Powell formally amended the inflation target criteria, saying they are just looking to “average” 2% over time.

He was signaling that they would let the economy run hot (for an unspecified period of time), letting inflation run above 2%, to make up for the decade of below target inflation.’

They also adjusted the way they respond to the labor market.

Before 2020, the Fed viewed a tight labor market as inflationary.

As part of the framework review, they abandoned that as a hard and fast rule — saying that low unemployment alone would no longer be enough to justify tightening.

This was all an effort to signal to markets that they were determined to keep policy ultra-easy, in order to sustainably escape from the sluggish, deflationary economic conditions of the post-crisis era.

Then came the pandemic.  The pandemic response.  And four decade high inflation.

With all of that in mind, in a speech three months ago, Powell telegraphed the return to the normal settings on the framework (i.e. back to the strict 2% target, and back to assessing a tight labor market as inflationary).

If this is codified in the speech on Friday, this would not be the “relenting to White House pressure on rates” the market is hoping for.