Author: Claire Velayas

Personal Consumption Expenditures (PCE)

The Fed’s favorite inflation gauge, PCE, showed headline inflation rising 0.3% in August, coming in a touch hotter than expected. On an annual basis, the rate edged higher from 2.6% to 2.7%, exactly in line with market estimates.

Core PCE—which strips out food and energy and is the Fed’s main focus—rose 0.2% on the month, while the year-over-year figure held steady at 2.9%. Both met expectations.

Looking under the hood, the 3-month annualized Core PCE run rate is still elevated at 2.9%, likely reflecting the temporary impact of tariffs, while the 6-month run rate sits at a more moderate 2.48%.

Shelter costs continue to weigh heavily on the data. Shelter rose 0.36% last month and 3.9% year over year, with rents up 0.3% and Owners’ Equivalent Rent up 0.38%. But real-time rent trackers show blended rents closer to 2.5% year over year. Given Shelter’s heavy weighting in Core PCE, this means the reported 2.9% Core PCE is overstated by roughly 0.3%—true inflation is likely closer to 2.6%.

Looking ahead, September’s PCE (due at the end of October) may be another challenging report, since it will be replacing a relatively low 0.28% Core PCE from last year.

Income and Spending

Personal incomes rose 0.4% in August, while consumer spending increased 0.6%, both slightly stronger than estimates. The savings rate ticked down from 4.8% to 4.6%.

Potential Government Shutdown

If Congress doesn’t pass a funding bill by October 1, a government shutdown will begin. That could impact the release of key economic data. We’re likely to still see JOLTS and ADP, but Jobless Claims and the all-important BLS Jobs Report may be delayed, depending on how funding is handled for the BLS.

Cotality Rent Index

Shelter costs—mainly rent—make up the largest portion of both CPI and PCE, which is why the latest Cotality Rent Index is so important. Rents rose just 0.2% in July, well below the historical average of 0.7% for that month. On a year-over-year basis, rent growth slowed from 2.9% to 2.3%, a meaningful deceleration.

If these real-time rent measures (similar to Zillow’s blended rent data) were incorporated into CPI and PCE, Core CPI would be 0.5% lower, and Core PCE would be 0.3% lower. This reinforces the view that official inflation readings are overstating shelter inflation and should continue easing over time.

Minneapolis Fed President Kashkari

Neel Kashkari, who will become a voting member next year, weighed in on CNBC this morning. He expects shelter costs and other services to keep trending lower, ultimately pushing inflation back toward 2%. He noted tariffs are delaying the timeline but sees them as one-time price shocks.

Kashkari supported two additional rate cuts this year, aligning with the nine “dots” on the Fed’s dot plot. On the labor market, he described conditions as fragile, with limited hiring reported by his business contacts.

Conference Board Leading Indicators

The Conference Board’s Leading Economic Indicators fell 0.5% in August, hitting an 11-year low. Their updated forecast calls for 1.6% U.S. growth in 2025, consistent with the Fed’s projections. Slower growth should be supportive for Bonds and mortgage rates, though they are not calling for a recession at this stage.

Atlanta Fed Wage Tracker

Wage growth in August held steady at 4.1%, unchanged from July and down from 4.6% a year ago. For Job Stayers, wage gains slowed to 3.8% from 4.1%, while Job Switchers saw a pickup to 4.4% from 4.0%.

The Cost of Waiting

With inflation stabilizing, the labor market cooling, and the Fed all but confirming a rate cut for their September 17 meeting, mortgage rates improved quickly. But remember—markets are forward-looking. Much of this move has already been priced in, and history shows that these windows of lower rates don’t stay open long. Timing is critical, and the opportunity could be just a few days.

ECB Update

Across the Atlantic, the European Central Bank held rates steady at 2.0% in a unanimous decision—no surprise there, given markets had priced in a 99% chance of a pause. The real surprise came in the form of stronger growth projections, with 2025 GDP revised up to 1.2% from 0.9%.

BLS Jobs Report – Weak Across the Board

The August Jobs Report came in far softer than expected. The BLS showed just 22,000 jobs created, well below estimates of 75,000. Prior months were also revised down by a net 21,000, with June now showing a negative number – breaking a 54-month streak of job gains.

A big factor was the Birth/Death model, which added 90,000 jobs. Without it, headline job growth likely would have been negative. Healthcare and Social Assistance made up nearly all the gains, with 47,000 jobs added – an area that had looked weaker in the ADP report.

The Household Survey told a different story, showing 288,000 job gains, but it remains volatile after reporting 863,000 job losses over the prior three months. Importantly, the unemployment rate ticked higher from 4.2% to 4.3%, in line with expectations. However, the quality of jobs was concerning – 357,000 full-time jobs lost offset by 597,000 part-time jobs gained.

Signs of strain are building. The average length of unemployment rose to 24.5 weeks, the highest since April 2022. Part-time workers unable to find full-time positions climbed to 1.3M, near Covid-era highs. The broader U-6 unemployment rate moved up to 8.1%, the highest in almost four years.

The JOLTS report earlier this week also pointed to weakness, with job openings per unemployed worker dropping below 1 for the first time since 2018 (ex-Covid). Even with some overcounting in openings, the takeaway is clear: there are now more unemployed people than available jobs.

On the wage side, Average Hourly Earnings rose 0.3%, right in line with expectations, but year-over-year growth cooled from 3.9% to 3.7%. The average workweek held steady at 34.2 hours. Together, this brought weekly earnings growth down to 3.4% year over year.

What this means for rates: With a soft labor market and cooling wage pressures, the Fed is under pressure to act. Markets are now pricing in a 100% chance of a 25bp cut in September, followed by high odds of additional cuts in October and December. We’ve been calling for three cuts this year, and the data is increasingly lining up with that outlook.

Personal Consumption Expenditures (PCE) – Market Update

The Fed’s preferred inflation gauge, PCE, came in right on target for July. Headline inflation rose 0.2% month-over-month and held steady at 2.6% year-over-year, matching expectations.

The Core rate—which strips out food and energy and is the Fed’s main focus—also rose 0.3% monthly and ticked higher from 2.8% to 2.9% annually, but this was fully anticipated by markets.

Looking under the hood:

• The 3-month Core run rate moved up from 2.52% to 2.94%, likely elevated by temporary tariff effects.

• The 6-month run rate eased from 3.09% to 2.95%. Both measures are trending lower than February’s peaks, showing longer-term progress.

 

One distortion in the data was Portfolio Management costs, which rose 5.4% and artificially added 0.1% to inflation. This isn’t true inflation—it simply reflects higher dollar-based fees on larger portfolios as asset prices climbed.

Shelter was more moderate, up 0.27% in July and 4% annually. Rent rose 0.26% and Owners’ Equivalent Rent rose 0.28%. Real-time rent data suggests inflation here is overstated by about 0.2%, meaning Core PCE is closer to 2.7% than reported.

Personal Income rose 0.4% and Spending rose 0.5%, both right in line with estimates.

Bottom line: The bond market took the report in stride. Despite Core PCE inching up year-over-year, the move was expected given tariffs. Importantly, this release should not alter expectations for a September 17 Fed rate cut.

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Fed Governor Waller’s Comments

Fed Governor Christopher Waller—one of the leading candidates for the next Fed Chair—gave a notable speech on labor, inflation, and monetary policy. Key takeaways:

• He expects negative revisions to jobs data, with May–July likely showing outright job losses after adjustments.

• Labor demand is softer, but so is labor supply. While fewer jobs are needed to keep unemployment stable, Waller noted we’ve never seen the “breakeven” turn negative—until now.

• The quit rate is at its lowest since 2010, and businesses report delaying hiring due to tariff uncertainty, AI disruption, and softer demand. Teen unemployment is also rising.

• He highlighted survey response delays, which cause larger revisions. This doesn’t make the data less reliable, but it does explain why revisions have been so meaningful lately.

 

On inflation, Waller believes that once tariffs are stripped out, inflation is running close to the Fed’s 2% target.

He also sees the neutral Fed Funds rate at 3%, meaning today’s 4.375% level is still restrictive by 1.375%. This gives the Fed plenty of room to cut while maintaining a cautious stance.

Waller supported a rate cut in July and is even more confident about cutting on September 17—favoring a 25bp move rather than 50bp. With Polymarket showing him as the current frontrunner for the next Fed Chair at 34%, his views carry weight. Given his deep understanding of economic data, Waller would be a strong candidate.

Powell at Jackson Hole – What It Means for Rates

Fed Chair Jerome Powell acknowledged that job growth has slowed much more than previously thought, with recent revisions confirming a softer labor market. He noted that downside risks to employment are building, and if they show up, they could hit quickly through layoffs and rising unemployment.

On inflation and tariffs, Powell maintained that the impact should be relatively short-lived—a one-time bump in prices rather than a sustained trend.

Growth has cooled notably, now running at about 1.2% for the first half of the year, roughly half its prior pace. Powell closed by saying the Fed’s current policy stance is restrictive, and the changing risk picture could warrant an adjustment.

The market heard that loud and clear—odds of a 25bp rate cut at the September 17 meeting are now hovering around 90%. Still, a few data points could shift the tone: PCE later this month, CPI in early September, and the September 5 Jobs Report will likely be the biggest driver. Weak data would cement a cut; strong data could make the Fed hesitate.

One wild card: QCEW Benchmark Revisions coming September 9 could change the narrative if they show stronger late-2024 job growth than initially reported.

Separately, there’s political noise: Fed Governor Lisa Cook is under scrutiny for alleged mortgage fraud, and President Trump has indicated he would move to replace her if she doesn’t resign. If that happens, a new Trump appointee would likely lean more dovish, adding another vote for rate cuts.

Fed Commentary

Chicago Fed President Austan Goolsbee noted that he had been fairly comfortable with this year’s inflation reports—until the latest PPI release showed services inflation rising 1.1%. While he cautioned against overreacting to a single CPI or PPI print, he made it clear that the Fed will be watching closely for trends. If inflation readings continue to soften, Goolsbee believes the right move would be to start cutting rates.

On the labor front, he highlighted the challenge of relying on headline job creation numbers given immigration-related population shifts. Instead, he’s placing more weight on ratios like the unemployment rate. The last three jobs reports—19k, 14k, and 73k—point to notable weakness, and household survey data shows 863k job losses over the past three months. Even with a shrinking labor force, those numbers are hard to ignore, especially as unemployment edges toward 4.3%.

St. Louis Fed President Alberto Musalem added that labor market risks are increasing, while the persistence of recent inflation pressures appears limited. He expects the tariff impact to fade within two to three quarters. Importantly, he did not commit to a September cut and pushed back on the idea of a 50bp move, calling it unjustified in the current environment.

Richmond Fed President Thomas Barkin echoed the Fed’s dilemma—risks exist on both sides, with inflation and unemployment showing potential to rise. The balance is still unclear.

Retail Sales

July retail sales rose 0.5%, slightly below expectations, though June’s numbers were revised higher. Core Retail Sales, which feed directly into GDP, also rose 0.5%—a bit stronger than anticipated—with upward revisions as well. Overall, consumers continue to spend, even with tariffs making the true impact harder to quantify.

Industrial Production & Capacity Utilization

Industrial Production dipped -0.1% in July, missing expectations, while Capacity Utilization ticked lower to 77.5%. This trend shows factories are operating below capacity, which reduces pricing power and often pushes producers to cut prices—making this report somewhat deflationary.

Crestone’s Takeaway

The Fed continues to weigh conflicting signals: softening labor data, sticky but moderating inflation, and resilient consumer spending. For housing and mortgage markets, the combination of cooling jobs and potential Fed cuts could create downward pressure on rates. That said, the Fed is still signaling caution, meaning markets may need more confirmation before a clear rate-cut path emerges.

The big news this week was the announcement of Fed Governor Kugler’s replacement. President Trump said he will fill the vacancy with Council of Economic Advisors Chair Stephen Miran. While Trump noted he is still searching for a permanent replacement, Miran’s appointment makes him a serious contender for the next Fed Chair.

This also signals that Kevin Hassett may be less likely to get the nod. Right now, we see Kevin Warsh and Stephen Miran as the frontrunners. That said, the administration announced today they are widening the search, adding names like former St. Louis Fed President James Bullard, former Bush economic adviser Marc Sumerlin, current Fed Governor Christopher Waller, and a few others to a list of about ten candidates. Bessent will be leading the search and conducting initial interviews.

It’s notable that instead of narrowing the field, they’re opening it up. Previously, Trump had said there were four strong candidates—Warsh, Hassett, Waller, and Miran. Still, with Miran stepping in now, we think the Fed is likely to lean more dovish moving forward, which is generally positive for interest rates.

In the markets today, yields on the 10-year Treasury moved higher and nearly tested resistance at 4.29%—one of the reasons we locked two days ago. Mortgage Bonds held up a bit better, finishing the day only slightly lower.

BLS Jobs Report – Big Miss, Bigger Revisions

The July Jobs Report from the Bureau of Labor Statistics (BLS) missed the mark, with just 73,000 jobs added, well below expectations of 110,000. But the headline doesn’t tell the whole story.

Under the surface, the raw (non-seasonally adjusted) data actually showed 1.07 million jobs lost. The BLS added 257,000 jobs through their Birth/Death model, which estimates new business formation. Without this adjustment, we’d likely be looking at a negative print. And while that model tries to estimate economic activity, the BLS’s own Business Employment Dynamics (BED) report just revised Q4 2024’s Birth/Death contribution down by 170,000 jobs—not exactly confidence-inspiring.

Revisions were also a major theme:

• May was originally reported at 139,000, then adjusted to 144,000, and now slashed to just 19,000.

• June, initially printed at 147,000, is now down to 14,000, with one more revision still to come.

 

If that June number goes negative (like ADP already has), it would be a stunning reversal. So far in 2025, the BLS has averaged 77,000 in downward revisions per month—double the revision pace from 2024.

Zooming in:

• Private sector payrolls added just 83,000 jobs, largely from education and health services.

• Last month’s private payrolls were also revised to flat.

 

And while the Business Survey gives us the headline number, the Household Survey (which drives the unemployment rate) showed a 260,000 job loss. That pushed unemployment from 4.1% to 4.2%, but the exact figure was 4.248%—just a hair away from rounding to 4.3%.

We’re also seeing more Americans drop out of the labor force. The participation rate has fallen to 62.2%, down 0.5% over the past 10 months. That’s equivalent to roughly 7 million people leaving the labor force since April. The broader U-6 unemployment rate ticked up from 7.7% to 7.9%.

Wages and Hours

• Average Hourly Earnings rose 0.3% in July and 3.9% year-over-year (slightly hotter than expected).

• The average workweek increased from 34.2 to 34.3 hours.

• Together, that boosted average weekly earnings by 0.6%, a stronger number—thanks mostly to longer hours worked.

 

Bowman and Waller Were Right

Fed Governors Michelle Bowman and Christopher Waller, who dissented at the recent Fed meeting and pushed for a rate cut, now look prescient. They argued that:

• Tariffs are a one-time price shock, not lasting inflation.

• GDP growth averaged just 1.2% through the first half of the year.

• And most importantly, that the labor market is much weaker than the BLS reports suggest, due to consistent overestimation and heavy downward revisions.

 

Bowman even cited a custom metric—Core PCE inflation minus tariffs—which she pegged at 2.5%, not far from the Fed’s 2% goal.

Bottom line: If the Fed had seen the final numbers from May and June upfront—19,000 and 14,000 jobs—they would have likely cut rates this week. And as we’ve been saying: revisions matter.

Fed Leaves Rates Unchanged – Dovish Shift Emerging

The Fed held rates steady yesterday, keeping the Fed Funds Rate at a range of 4.25% to 4.50%, as expected. But there was a notable development: two Fed Governors, Waller and Bowman, dissented and pushed for a rate cut. This marked the first time in 32 years that two Fed Governors have dissented in the same meeting—clear evidence that more members are leaning dovish.

The Fed’s statement acknowledged that economic activity “moderated” in the first half of the year, a downgrade from the previous description of “solid” growth.

During the press conference, Fed Chair Powell said the slowdown is largely due to weaker consumer spending. He also addressed GDP distortions from tariffs on imports, noting that Q1 and Q2 should be considered together. Powell estimates combined annualized growth at just 1.2%—a soft reading.

He also noted that tariffs may be a one-time price shock, not a long-term inflation driver. On the labor market, Powell highlighted that once the BLS’s data is revised through the QCEW, we may be seeing close to zero private-sector job growth. If accurate, that’s another reason to ease up on policy sooner rather than later.

Recent data from Bank of America also shows cracks forming: spending on services (hotels, airfares, dining) has dropped three months in a row—the first time we’ve seen that since 2008. Lower-income households are also pulling back on credit card use. With monetary policy working on a lag, the Fed risks being behind the curve if they wait too long to act.

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PCE Inflation – Slightly Hotter, but Within Expectations

The Fed’s preferred inflation gauge, Personal Consumption Expenditures (PCE), showed:

• Headline PCE rose 0.3% in June (as expected)

• Year-over-year: 2.6% vs. 2.5% expected (due to prior revisions)

• Core PCE (excluding food and energy): +0.3% month-over-month and 2.8% year-over-year

 

While monthly numbers came in line, the short-term trends were a bit hotter:

• 3-month Core PCE annualized: 2.6% (up from 2.0%)

• 6-month Core PCE: 3.1% (up from 3.0%)

 

Still, both metrics have cooled significantly since February, when they ran at 4.1% and 3.4%, respectively.

Personal Income rose 0.3% (a bit stronger than expected), while Spending rose 0.4% (a bit weaker).

The Bond market took the report in stride. However, it will be tough to see meaningful progress on Core inflation through year-end—especially with lower upcoming monthly replacements and potential short-term price impacts from tariffs.

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Jobless Claims – Mixed Signals from the Labor Market

Initial Jobless Claims ticked up slightly last week, rising 1,000 to 218,000—still historically low. But Continuing Claimsremain elevated at 1.946 million, flat from the prior week and now above 1.9 million for ten straight weeks.

The takeaway? Layoffs remain low, but rehiring is slower. Workers who lose their jobs are staying unemployed longer—a sign that hiring demand may be softening.