Inflation and the Fed's Path
July's inline CPI paired with slightly hot PPI points to a firm July PCE reading. Nothing alarming. Taken together, the case holds for the Fed and most of its members to keep rates unchanged. The market has now priced out a September hike, which buys Fed Chair Kevin Walsh more room heading into Jackson Hole.
Attention shifts to that Jackson Hole speech and the Fed's read on August data. August payrolls could bounce back, because July was distorted by local government hiring swings and a hangover effect from the World Cup. Labor and inflation data stay the main focus in coming weeks. Retail sales matter, but there is no sign of an outright slowdown in the consumer sector right now, given steady payroll growth over the past several months.
Stocks Can Rally Even With a Hawkish Fed
The base of the economy explains why. Second-quarter headline GDP looked soft, but most of that came from the import-export gap. Strong business investment carries an import bias, and strong imports subtract from US GDP by the math. Consumer spending stays resilient and business investment is strong, so the fundamental case for equities holds even if the Fed turns a bit hawkish.
For that case to break, the Fed would have to commit to an aggressive hiking cycle, which is not in view. History shows that a "non-cycle" - a couple of hikes then done - or a slow cycle of 25 basis points every other meeting, tends to draw a good market response over the medium to long term, because it lines up with a growing economy that avoids recession. A hawkish pivot could still spark a volatility event, but nothing suggests one or two hikes would derail the current rally.
Q2 Earnings and the Productivity Story
Earnings backed the productivity thesis Walsh favors, that US productivity gains will ultimately be deflationary. Investment is relatively strong while employment has not caught up to what that investment implies. The lag before productivity gains show up is historically long, so do not expect it now.
Even after adjusting for unrealized gains hyperscalers hold in other companies, blended second-quarter growth sits just above 40% - roughly double the figure from a few weeks earlier. Combined with broad guidance raises across the S&P 500, this was close to a perfect quarter: beats on the top line, beats on the bottom line, and raised guidance. That mix is not always tied to the strongest equity performance in history, but it keeps a strong fundamental base for stocks. On the day, the S&P 500 set records, up about 78 points to around 6413.
Bitcoin Trading on Its Own Terms
Bitcoin (BTC) stayed flat over the past few days and through the CPI and PPI readings, trading this year as a low-correlation asset. Over the long term it has low correlation to every other asset class, and it is returning to that fundamental state. Employment reports and the Fed at Jackson Hole are not expected to move its price much right now. Starting points matter: Bitcoin is down about 50% from its highs, so sellers may be exhausted here.
Clarity Act and the Midterm Catalyst
The Clarity Act is unlikely to pass this year, making the midterm elections the next fundamental catalyst for digital assets. A cloture vote was scheduled for September, but passage looks doubtful. Clarity drew bipartisan support in the House, where 70 Democrats joined Republicans to pass it, yet in recent weeks it has turned more partisan.
Markets could react to November's outcome. A blue wave or a Democratic win in the Senate might be seen as something that could delay or derail the Clarity Act - a negative - while Republicans holding the House could be read as a positive. All year the evidence has been that Clarity Act passage was never reflected in Bitcoin's price. So it matters less as a pricing issue and more as a regulatory one.
