The AI revolution, the war in the Middle East, and high rates are finally starting to show up in the economy, or more specifically, the US labor market. In July, the US lost 23,000 jobs, with 53,000 fewer in the public sector and 30,000 more in the private sector, while May and June employment was revised down by 103,000.
The bad news is that the data points to a slowing economy and could weigh on consumer confidence. The good news is that it gives the Fed more room to keep rates where they are rather than hike. And that’s exactly what markets seem to be betting on: CME FedWatch now puts the odds of no September hike at 46%, down from 57% before the jobs data.
Now the big question is what happened to inflation in July.
Going in, headline CPI is expected to rise just 0.1% after falling 0.4% in June, while core CPI is expected to rise 0.2% month-on-month. Core CPI is expected to slow to 2.5% year-on-year, its lowest level since February. If the numbers come in below expectations, bets on tighter Fed policy should fall, giving another boost to the S&P 500, Dow Jones, Nasdaq, and gold prices.
At the same time, even weak inflation data would not guarantee a rate cut at the next meeting, as Middle East inflation risks remain with the Strait of Hormuz still closed despite optimistic comments from Trump and Bessent.
As for the talks, Iran has toughened its demands for reopening Hormuz, including lifting the naval blockade, withdrawing US troops from neighboring countries, removing sanctions, unfreezing Iranian assets, and paying reparations, while tensions around Saudi Arabia have also risen after the Houthis claimed to have attacked the Saudi Aramco refinery in Jizan. So if there is a light at the end of the tunnel, it’s not getting any brighter.
The optimism is probably driven by hopes of a new TACO. And there’s a reason for it. According to the WSJ, with gas prices high and the midterms approaching, Trump would be willing to sell an end to the Iran conflict as a win, even without a nuclear deal, as long as he can reopen the Strait of Hormuz.
The question is whether Iran will agree without adding more demands, such as payments for passage through the Strait.