Fed Hike Odds Plummet as Retail Sales Contraction and Job Losses Shift Market Sentiment

Market expectations have shifted significantly in recent weeks, with investors now anticipating only one Federal Reserve rate hike by the end of 2026. As recently as July, a two-rate-hike scenario was widely expected, and a September increase seemed all but certain.

The change in sentiment can be attributed to several factors. Firstly, retail sales contracted by 0.6% in July, according to data from the Commerce Department. This indicates a potential softening of consumer demand, which may ease upward pressure on inflation and allow the Fed to maintain its current policy stance.

Furthermore, consumer price index (CPI) inflation remained at 3.4% year-over-year in July, while producer price index (PPI) inflation stood at 4.7%. Although both indices are above the Fed's target rate of 2%, they have been trending downward from previous months.

Lastly, non-farm payroll growth turned negative in July, with the US economy losing 23,000 jobs last month. This development also contributes to a more dovish outlook for the Fed, as it suggests less inflationary pressure from wage growth and overall demand.