In this post-July FOMC meeting world, the first set of meaningful data probably put a smile on the policy maker’s face. Indeed, Q2 real GDP rose a better-than-expected +2.4%, while the Fed’s preferred inflation measure, June core PCE, fell to +4.1% on an annualized basis, also better than consensus forecasts.

While a continued cooling in inflation and a reasonably solid economic growth setting would appear to be two ideal outcomes for Powell & Co. and certainly welcome developments, we would continue to urge some caution. As the Fed Chairman made abundantly clear at last week’s presser, the Fed is not going to make future policy decisions based upon one month’s set of data. If we could use one word to describe what the policy maker is looking at, it is the “totality” of incoming economic releases that is the focus. In fact, this theme really is the key behind a data-dependent approach to monetary policy.

That being said, let’s take a look at the GDP statistics and go under the hood a bit. While we have written about the resilient consumer lately, there was a noticeable drop-off in household spending in Q2. Specifically, PCE posted a more modest gain of +1.6% last quarter, a rather sizeable deceleration from the +4.2% increase in Q1. Is this the beginning of a consumer that will become more cautious going forward? Given the solid labor market setting and higher interest income potential we discussed a couple of weeks ago, we think the consumer can remain a supporting force for the overall economy, but perhaps not to the same degree that was witnessed in the first quarter. In addition, let’s keep our eye on three other cylinders of the GDP engine: private domestic investment, inventories and net exports. Those three components carry the potential to tip the scales one way or the other going forward. Interestingly, government outlays may remain in the plus column, no doubt the by-product of running trillion-dollar deficits.

What about the inflation side of the equation? The aforementioned increase in core PCE represented the slowest pace for this gauge since September 2021 and compares to the high watermark of +5.4% that was registered in February 2022. Up until this decline of -0.5 pp in the June reading, the improvement in core PCE had been rather grudgingly slow. To provide perspective, the year-over-year rate for core PCE had come in between +4.6% and +4.8% for the last seven months in a row. From a component perspective, goods inflation posted its third contraction in the last four months. On the service side of the ledger, prices rose +0.3%, or half the amount of increase that was being printed in the December/January period. However, service inflation has been sort of stuck at this level since March.

Back to the totality concept. Another key aspect for future policy decisions will be the labor markets, and in that regard, the setting continues to remain more on the solid side. The latest weekly jobless claims data showed an unexpected drop to 221,000, the lowest level since February.

The bottom line is that it looks like the U.S. Treasury market is finally getting the message. The widely anticipated recession, which may still be forthcoming, is not on our doorstep yet, and inflation, while cooling, is still double the Fed’s 2% threshold.