goldman sachs fed inflation remains the main theme for the Federal Reserve, with Goldman Sachs saying softer labor data matters less for September.
Goldman Sachs said last week’s CPI report came in about as expected and sparked a modest rally in bonds. Pricing for the Fed’s September meeting then eased by a few basis points to about nine basis points. Meanwhile, a cooler than expected PPI reading helped lift the S&P 500 to a record closing high last Thursday.
Mike Mitchell, Goldman Sachs treasuries and inflation trading head, said core inflation rose 21.5 basis points. However, he said the signal for the Fed’s preferred core PCE measure looked somewhat softer because services categories carried more weight and came in soft. Speaking on Goldman Sachs’ Markets podcast, he said the data should give the Federal Reserve some comfort before its September meeting.
Goldman Sachs Fed Inflation Stays Central
Mitchell said he does not view the week’s weaker payrolls report as a key driver for the September decision. The report marked the first month of negative job growth in some time. However, he said demographic shifts and changes in immigration policy mean the labor market needs little job growth to keep the unemployment rate steady.
He added that the unemployment rate has barely moved over the past year. Therefore, inflation remains the Fed’s main focus. Goldman Sachs said softer employment data is largely irrelevant to the policy path.
Treasury Supply Keeps Long Yields Under Pressure
Mitchell said a difficult U.S. budget outlook continues to push term premium higher in the bond market. He described that force as global, not only U.S.-specific. He also said investors were uneasy after the Fed chair’s comments following the July meeting suggested higher long-term yields could stand in for more policy rate moves.
The week’s 10-year Treasury auction, which carried the highest yield since 2007, was still well absorbed. Additionally, the later 30-year auction also went smoothly as cooler PPI data supported the disinflation view. Goldman Sachs also said heavy corporate debt issuance linked to AI infrastructure could add to the same pressure, with estimates of $250 billion this year and as much as $400 billion next year.
Mitchell said real yields near 2.5% at 10 years and near 3% at 30 years look historically high. He said his preferred trade is a curve steepener because the front end already reflects likely Fed action, while the long end still faces supply pressure. Goldman Sachs is now looking to minutes from the Fed’s July meeting for more clues on the September debate.
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Source: InvestingLive
