U.S. consumer, employment, and inflation data are collectively weakening the case for a Federal Reserve rate hike in September, while market pricing for the interest rate path remains relatively hawkish, leaving room for adjustments.
According to Goldman Sachs Chief Economist Jan Hatzius in a global macro research note published on August 16, a rate hike at the September FOMC meeting has become "very unlikely," barring a dramatic shift in August data due in early September—which is not the baseline scenario. This assessment is not based on a single data point but on three concurrent trends: cooling consumption, near-stagnant employment trends, and improving inflation.
For investors, the key takeaway is that even though market pricing for the federal funds rate has already pulled back somewhat, the current path assumptions still suggest there is room for interest rate pricing to move further downward. At the same time, the asset allocation strategy of maintaining a steeper U.S. Treasury yield curve and expecting major stock indexes to continue rising by year-end remains in place.
Consumer rebound was a temporary spike; H2 growth rate compressed to 1% to 1.5%
The July retail sales decline has a technical explanation: Amazon Prime Day occurred earlier than usual, pulling forward some demand. However, the report points to deeper underlying causes.
A revised consumer spending path indicates that the strong U.S. real consumer spending in the spring was primarily driven by a temporary income boost from a surge in tax refunds, rather than a fundamental strengthening of the household sector. With real cash flows stagnating, real consumer spending growth in the second half of the year is expected to slow to 1% to 1.5%, with overall economic growth likely running slightly below potential.
Risks to the consumption forecast are also tilted to the downside. The Strait of Hormuz remains closed, and if gasoline prices rise again, the impact would disproportionately fall on low- and middle-income households. Business investment remains strong, and the wealth effect from earlier stock market gains will provide a lagged boost to GDP, but this is unlikely to fully offset the drag from consumption.
Declining unemployment rate masks underlying labor market weakness
Superficial data appears contradictory: the U.S. unemployment rate fell from 4.5% in December to 4.1% in July, which does not directly support a narrative of "weakening employment." However, the report notes that this decline should not be interpreted in the usual way.
Both nonfarm payrolls and the household survey employment showed month-over-month declines in July. Estimated trend employment growth has fallen to about 5,000 per month, far below the roughly 50,000 per month needed to maintain a stable unemployment rate. If this pace continues in the coming months, the previous decline in the unemployment rate could be partially reversed.
The key point is that the decline in the unemployment rate was mainly driven by a falling labor force participation rate, not an increase in the number of employed people. The decline in the employment-to-population ratio is evident in both the aggregate data and a version adjusted for demographic changes. At the same time, wage growth continues to weaken, further undermining the case that the labor market is tightening.
July inflation reading was artificially high; core PCE trend remains intact
Over the past two months, U.S. inflation has shown an overall improvement. Core PCE rose 0.13% month-over-month in June and is projected to rise 0.20% in July. The July reading may appear slightly elevated, but Goldman Sachs notes that more than half of the increase came from the portfolio management services component, whose measurement method is inherently controversial—when asset sizes grow and management fees charged as a fixed percentage rise accordingly, most people do not view this as a price increase. Additionally, this component is expected to undergo a significant downward revision by the end of September and has a history of repeated revisions.
Other temporary inflationary factors, such as tariffs, software and accessories, and energy prices, are also on a fading path. The overall trajectory of core PCE inflation approaching 2% by 2027 has not been altered by the single July reading.
Market rate hike pricing is hawkish; interest rate path still has room to adjust downward
The June dot plot showed that 9 of the 18 FOMC participants who submitted forecasts expected a rate hike in 2026, but by an estimate of voting members, only about 4 to 5 out of 12 were truly inclined to hike. The July meeting saw three explicit dissenting votes, indicating a more vocal hawkish stance.
However, with employment and inflation data both clearly softening over the past two months, the likelihood of dovish members shifting to support a rate hike under this data mix is extremely low, thus raising the bar for a September rate hike very high.
At the asset pricing level, Goldman Sachs' path assumptions point in a relatively consistent direction across multiple fronts: improving inflation and a declining rate hike premium, coupled with fiscal concerns, point to a further steepening of the U.S. Treasury yield curve; strong second-quarter corporate earnings and a stabilizing AI trade have pushed major stock indexes to new highs, with the upward path still valid by year-end; in foreign exchange, globally moderate inflation favors high-yield currencies maintaining their strength, with the dollar versus the Canadian dollar and the euro versus the Swiss franc both retaining their advantages.
European Central Bank may hike 25 basis points in September, but the next move looks more like a cut
The macro challenge for Europe is that energy prices remain high, while core inflation is only moderately above target. Under this mix, Goldman Sachs maintains its baseline forecast of a 25-basis-point rate hike by the European Central Bank in September, but simultaneously notes that the next move after this hike is more likely to be a cut, occurring around mid-2027.
On political risk, the 2027 French presidential election has begun to enter the market's view. The first round is scheduled for April 18, 2027, with the runoff between the top two candidates on May 2. A model based on polls shows that Marine Le Pen's current probability of winning the presidency is about two-thirds. The composition of her runoff opponent is crucial: if she faces former Prime Minister Edouard Philippe or another centrist candidate, the second round remains competitive; if her opponent is Jean-Luc Melenchon, Le Pen is almost certain to win. In current first-round polls, Philippe ranks second and Melenchon third, but the latter has a history of outperforming polls.
Notably, there is a structural decoupling between European stock markets and the European economic fundamentals. The automotive sector accounts for only about 1% of the market's market capitalization, limiting its drag on the index; higher oil prices are negative for European GDP but positive for the index, as oil and gas producers have a significant weight in the Stoxx 600. In the first half of this year, Stoxx 600 earnings per share grew by 14%, while nominal GDP growth was only 3.3% and real GDP growth was just 0.7%. Over the past 18 months, the Stoxx 600 has outperformed the S&P 500; since 2022, European bank stocks have significantly outperformed U.S. mega-cap tech stocks. The report believes that European valuations are still reasonable and that the Stoxx 600 has the conditions to continue outperforming.
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