Yellen 'Rate Hike' Remarks Upstage Strong Trade, Soft Inventory Results

Janet Yellen’s Jackson Hole speech this morning upstaged today’s data. The Fed chair said that “the case for an increase in the federal funds rate has strengthened in recent months.” While she did not elaborate on the timing, the implication was that the FOMC would follow through on plans for another rate hike before the end of the year. The odds for action in September have risen but remain, we think, below 50%. The FOMC would require another solid jobs report for August (out next Friday) and, more important, further tangible indications that inflation is turning up or will soon do so.

The thrust of her speech was an argument that the Fed had a viable “took kit” of options to handle upcoming situations.

Meanwhile, today’s data were mixed. The Advance Indicators report showed a strong, if anomalous, increase in goods exports for July. The July inventory data were relatively soft, however. FMI does believe that the inventory correction finished by mid-year, but the non-farm change component may be only a moderate plus for 16Q3 GDP. The Second GDP report contained few meaningful surprises, but did have some welcome upward revisions to 16Q2  income.

We are tracking a solid rebound to +3%  real growth in 16Q3.

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