July 2026

The equity market continues to rally to new highs as consumer confidence has been buffeted by the 250^th anniversary of the United States and the 38 days of the World Cup soccer tournament.  The rally has continued despite new Fed Chairman Kevin Warsh’s frustrating abandonment of the full disclosure policies of the last three Fed chiefs.  Ignoring his repeated hawkish calls and specifically citing the overnight Fed Funds rate as the Fed’s main policy tool, he has yet to raise that rate.  We estimate the probability of the committee hiking in September is about 50 percent.

The July employment report was a big miss with the BLS reporting that the economy lost 23,000 jobs in the month, well below the 80,000 that were expected.  Moreover, the disappointing June report which originally showed 57,00 new jobs in the month was revised to 20,000, bringing the three-month average down to an anemic 20,000 jobs a month.

The BLS also noted that the unemployment rate declined for the second month in a row, falling to 4.1%.  As was the case last month, the cause of the fall was a workforce decline that was greater than the fall in household employment.  The U.S. labor force has fallen 1,318,000 workers since last July as Baby Boomers call it quits and opt for retirement.

The combination of the decline in new job creation and declining unemployment rate is more a symptom of a changing work force and will likely continue.  However, if the workforce shrinkage accelerates, it could put upward pressure on wages, which would only exacerbate the inflation problem the Fed continues to face.

The first estimate of Q2 GDP was a disappointing 1.5% annualized rate of growth versus an expectation of 2.0%.  A drawdown in inventory and a jump in imports weighed on the headline.  Consumer demand, on the other hand, was strong at 3.2% annualized rate.  We suspect that growth has been carried into the 3^rd quarter.  The Atlanta Fed GDPNOW indicator is currently estimating 5.83% growth so far this quarter.

The July Consumer Price Index gives the Fed further breathing room to postpone a rate hike.  Core CPI year-over-year rose 2.5%, down from 2.6% last month and, arguably, close enough to the Fed’s 2% target to declare victory.  A fall in energy prices was instrumental in helping to keep the inflation measure subdued, but with the war with Iran dragging on, there’s little confidence that energy prices will not spike again.

With employment and inflation statistics behind us, investor focus will shift to the Jackson Hole Economic Policy Symposium, the annual Central Bank gathering.  In years past the Fed Chair has used the keynote address as a platform to signal policy.  Given Warsh’s obfuscating we are not hopeful that will be the case this year. He is scheduled to speak on Friday August 28^th.