US stocks are hovering slightly below the flat line after two straight weeks of gains.
Now the markets are set to open in a little over 10 minutes.
Now once these release of July CPI will be key for investors following the week July off-farm payrolls report on Friday.
Now this week's data on inflation carries big implications for the Fed's September rate decision.
Joining us this morning to weigh in.
Brian Jacobson, chief economist for Annex Wealth Management, good morning and happy Monday, Brian.
Thank you so much for joining us.
So we are kicking off a big week for macro data here in the US, including inflation and retail sales.
But first and foremost, what did you make of the jobs report and tell us about the pullback in non-farm payrolls as well as revisions and the implications of that unemployment rate.
Yeah, thank you for having me.
Yeah, seeing the unemployment rate tick down was at first kind of encouraging, 0, 4.1%, but then when you dig into it, it went down for the wrong reason, right?
It can go down because the number of people unemployed is going down, but it can also change because of the labor force, and that was.
The big driver of that decline.
So, it was one of those things where on the surface, the decline in the unemployment rate was good until you dug into the details.
And then with that headline number -23000, I almost had to do a double take to make sure that that was indeed a minus sign and not a positive sign.
And so, on the face of it, that looked pretty bad because, well, it is, but when you peel back the layers of that onion, you can see that it was actually not absolutely horrible.
A lot of that was driven perhaps by some seasonal adjustment factors, cutbacks at the local level of government with educational funding.
We know that a lot of, uh, areas, we've seen massive changes in the places where people prefer to live, and there's also demographic challenges, and so there There was apparently an unseasonably large decline in the number of educators at a lot of municipalities.
So, the private sector seems like it's doing all right.
And so, it's really, I think the same thing in terms of with, uh, the inflation numbers, right?
The headline numbers are going to be very volatile when it comes to the labor market, driven by seasonal adjustment factors, and you also have the government cutbacks there.
And then on the inflation side, The headline driven by energy, and so it's really about what's the underlying signal, and I think the underlying signal for the labor market is one where it's strong, but not as strong as we thought it was, especially because of those back month revisions.
Yes, and you mentioned a key word there, Brian, and that is energy.
So we're continuing to monitor oil prices this morning.
Both WTI and Brent prices do continue to track higher but do remain off of 2026 highs.
So we continue to monitor the geopolitical situation, any progress that we're seeing.
But at the end of the day, all eyes do remain on the CPI data that's coming out on Wednesday and of course PPI on Thursday.
But what are your expectations for that reading?
Uh, my expectation is that we're going to see the core inflation, so excluding food and energy, improve a little bit.
Um, the last report said 2.6% year over year.
I think that could move a little bit lower, mostly driven by things like rent.
Um, that has been in a downward channel in certain areas.
Also, some of the taming of the inflation and other service areas, um, If you think about the increase, a lot of it has been driven by like leisure and hospitality with travel, and I think that's moderating a little bit.
So, the core is likely going to see some improvement.
The headline on a month over month basis, we'll probably see it increase, but that's mostly because with gasoline prices being on average higher in the month of July than in June.
And that's where I think I think it really gets to what you had pointed out about where we are with oil prices.
They have moved back up, but not back up to the peaks of earlier in 2026.
And so, even if we're in a choppy range here where we are, I think just mathematically, it's going to make the inflation picture look a little bit better.
But that doesn't deal with the affordability issue that so many people are really focused on.
As we approach the midterm elections, so I think that President Trump is probably going to want to change his tune and perhaps change action depending upon what happens with the price of oil.
If we break higher, I think we could see perhaps a more kinetic approach to trying to open up the Strait of Hormuz as opposed to right now.
It seems like he's just kind of saying that he'll exercise a little bit of patience.
Yes, and we are continuing to monitor the pain at the pump, but because we just talked about labor markets as well as inflation, I do want to get your take on the Federal Reserve.
So hard to believe, but we are already counting down to Jackson Hole, Wyoming.
What do you think will happen with the Federal Reserve, especially as we await those CPI figures?
I, I certainly hope that we hear more from Chair Warsh, not necessarily about offering forward guidance about where he thinks policy should go, but more about how he thinks policy should be, uh, managed.
It's what economists have called the reaction function.
Like, you know, what are the different levers that he wants to pull?
How is it that he thinks that the Fed should react to the data as it rolls in?
We're not asking.
Him to predict the data, just tell us how he would likely respond to it, and that's where I think he's going to put a lot of emphasis on how they have another tool at their disposal, which is the size of their balance sheet.
So to deal with structural inflation, something that isn't just cyclical, driven by supply chains, things like that, instead of focusing so much on the federal funds rate, they can focus on that balance sheet.
So I think he's likely going to offer a more spelled out, full-throated endorsement of the idea that they need to actually shrink the size of their balance sheet to deal with longer term inflation.
Using the federal funds rate is a very blunt tool, and it's mostly going to hit manufacturing, durable goods, and housing.
It doesn't really do anything about service sector inflation.
For that, they have to maybe focus a little bit more on the size and composition of their balance sheets.
So that's what I'm expecting to hear.
And Brian, finally, before I let you go, we have about 60 seconds here.
You mentioned affordability, and that is something that all of us do continue to monitor, especially in a midterm election year.
So given what you're seeing in the latest economic data points, what do you think the rest of 2026 will look like for Americans, especially as we head into back to school season?
Yeah, it's probably going to get a little bit worse before it gets better.
Uh, and it's mostly if you look at the labor market data, in there, you have average hourly earnings.
That's up 3.2% year over year, which is fine if you have 2% inflation, but we don't.
We have, you know, more than 3.2% inflation, so the real purchasing power of every hour that people are working is actually going down.
And I think that it's not going to really improve.
Materially until we get through some of this energy induced inflation because I'm not really seeing that wages are going to accelerate to make up the difference.
It's inflation that needs to come lower, which is one of the reasons why I think that the Fed still really wants to talk tough about inflation, even though the action that they might take might be more about the balance sheet as opposed to the federal funds rate.
Well, Brian, it was great having you on the show this morning.
Thank you so much for your time.
I appreciate your insights as well as your perspective.
Thank you so much.
