Hanging in there

Like the U.S. economy, financial markets have been amazingly resilient, especially recently. Over the last few weeks, they have shaken off fears of economic slowdown, global financial worries and geopolitical uncertainty. 

Now consumer focus seems to be turning to domestic politics and judging by the University of Michigan Consumer Sentiment survey for August, consumers are modestly more confident. Overall, expectations strengthened for both personal finances and the 5-year economic outlook, which reached its highest level in four months. Consumer inflation expectations were unchanged from the prior month. At 2.9% for the year-ahead and 3.0% for the longer term, both were slightly higher than the 2.2-2.6% pre-pandemic range. Consumer perceptions about the economy were little changed from prior months, but nearly half of respondents expect interest rates to fall in the year ahead, up from 36% in July and only 13% a year ago. 

Other data released last week confirmed that the domestic economy remains solid. Weekly jobless claims fell from 234,000 to 227,000, July retail sales increased 1.0%, well above expectations and inflation eased lower. Consumer prices rose 2.9% over the last year, down from 3.0% in July. This kind of Goldilocks scenario is precisely what the Federal Reserve had hoped to achieve, and it likely paves the way for it to cut its federal funds rate when it meets on September 18.