Markets head into Friday’s session on edge, with the Federal Reserve’s preferred inflation measure set to provide the final word before September’s policy call. Traders face a delicate backdrop, solid growth data reinforces the economy’s resilience, yet inflation risks remain a thorn in the Fed’s side.
Fed’s Inflation Test Ahead
The latest GDP revision showed the US economy expanding faster than initially thought, underscoring the strength of consumer demand. That momentum eased fears of an imminent recession but sharpened concerns about inflationary persistence. Core personal consumption expenditures the Fed’s favored gauge is expected to show its fastest pace in five months.
A cooler reading would likely solidify expectations for a September rate cut, anchoring confidence that the Fed can ease without reigniting inflation. A hotter number, however, would complicate that narrative, forcing markets to weigh whether policymakers will temper the speed of cuts despite political pressure and growing cracks in the labor market.
Geopolitics: Peace Prospects Fade
Optimism for a breakthrough in the Russia-Ukraine conflict has faded. German Chancellor Friedrich Merz cast doubt on reports of a possible meeting between Presidents Zelenskiy and Putin, dampening hopes previously raised by Washington. The White House signaled President Trump will deliver a statement on the conflict later today.
For energy markets, the diminished chance of a peace deal means Moscow’s supplies are unlikely to flow more freely in the near term. Yet the broader picture remains bearish, with oil under pressure from signs of oversupply and tepid demand.
Growth Signals, Policy Dilemma
Second quarter GDP growth, revised upward to above 3%, reflects a US economy that continues to defy slowdown predictions. Resilient household consumption has been the driver, though the sustainability of that trend is now in question as wage gains cool and job openings ease.
The Fed’s challenge lies in reconciling this growth with sticky inflation. For markets, that tension translates into binary risk around Friday’s inflation release, it could either validate the dovish consensus or deliver a hawkish shock that reshapes rate cut timelines.
SARACEN MARKETS VIEW: Data Will Decide the Trade
- Friday’s inflation print is pivotal. A softer number locks in September easing, while an upside surprise injects volatility across FX, bonds, and commodities.
- Growth resilience complicates the Fed’s path. Traders should prepare for a narrative shift from “when” cuts arrive to “how aggressively” they proceed.
- Geopolitical risks remain a layer of insurance. Even as oil struggles with oversupply, uncertainty around Ukraine limits downside complacency.
For traders, today’s PCE report is not just another data point it is the compass for Fed policy into year-end.
Disclaimer: This report is for informational purposes only. It does not constitute investment advice or represent the official views of any central bank or regulatory body.