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How are we thinking about the August 2025 U.S. CPI report?
August CPI data indicates core inflation remains steady at +0.3% m/m (and 3.1% y/y), inline with economists’ estimates, while initial unemployment claims picked up to +263k from +237k, their highest level since 2021 and well above the YTD average of +228k.
Inflation uncertainty previously led the Fed to adopt a more neutral stance, despite labor market weakness. We now anticipate the Fed will do more in 2025, so we are adding an additional rate cut to our forecast, which implies three cuts this year (one every meeting) versus our ‘old’ forecast of two cuts in 2025. We leave 2026 at three cuts, but our bias is towards either more cuts in 2026 and/or the end of Quantitative Tightening in 2025.
Though we think the Fed will be doing more in the near term, cutting an additional 25 basis points matters less when their balance sheet is still 22% of GDP, credit spreads are tight, equity markets are robust, and the dollar is weakening. Moreover, the technical picture (or lack of supply) is as good as we have seen in three decades. In this market we still see the ‘Glass as Half Full’, though we are tilting more towards operational improvement stories in Private Equity (especially corporate-carve outs), collateral-based cash flow (Infra, Real Estate Credit, and Asset-Based Finance), and structured deals (including structured equity with both downside protection and upside equity opportunity). We still see a weaker dollar, which means more money should flow overseas. That said, the U.S. story is not over, given what we are seeing on the productivity front (which should help offset weaker job growth).
