US Stocks Ignoring Warning Signs as Economic Weakness Grows

The US economy's inflation numbers for July were released this week, showing a slowdown in price growth. The Consumer Price Index (CPI) fell to 3.4% from 3.5%, while Core CPI edged down to 2.5% year-on-year, both in line with expectations.

The US dollar sold off slightly after the release, but stock index futures rose. However, this reaction was short-lived, and the market quickly recovered. The Fed's probability of leaving interest rates unchanged at its next meeting in mid-September rose to 68% from 50%, while the likelihood of a rate hike before year-end dropped to 68% from 78%.

The recent updates on inflation do not take into account the increase in oil prices since July, which may indicate that some tightening in monetary policy is possible. All major US inflation measures continue to exceed the Fed's 2% target, including Core PCE, which was previously the preferred gauge. This has led members of the Federal Open Market Committee (FOMC) to focus on 'price stability', but employment numbers are also becoming a concern.

The latest Non-Farm Payroll update showed a significant decline in jobs in July, below expectations and with downward revisions to previous readings. This may indicate some economic weakness in the US economy. Given the strong earnings growth announced by companies during Q2 results season and the importance of consumer spending in US GDP, it's possible that earnings growth may soon top out.