Goldman Sachs: Fed Will Not Hike Rates in September; Market Pricing Remains Hawkish

U.S. data on consumption, employment, and inflation are jointly weakening the case for a Federal Reserve rate hike in September, while market pricing for the interest rate path remains hawkish, leaving room for adjustment.

According to Zhuifeng Trading Desk, Jan Hatzius, Chief Economist at Goldman Sachs, pointed out in a global macro research report released on August 16 that a rate hike at the September FOMC meeting has become "very unlikely," unless there is a dramatic shift in the August data released in early September—which is not their base case. This judgment is based not on a single data point, but on the simultaneous turning point of three main threads: cooling consumption, employment trends approaching stagnation, and improving inflation.

For investors, the core issue is that even though the market's pricing of the federal funds rate has corrected somewhat from previous levels, the current path assumption still shows room for interest rate pricing to move further toward lower rates. Meanwhile, the asset allocation direction maintains a further steepening of the U.S. Treasury yield curve and a continued rise in major stock indices before the end of the year.

Consumption Rebound is a Temporary Spike; H2 Growth Pressed to 1%-1.5%

The decline in July retail sales has a technical explanation: Amazon Prime Day occurred earlier than in previous years, partially pulling forward subsequent demand. However, the report's judgment points to deeper reasons.

The revised consumption path shows that the strong real consumer spending in the U.S. this spring mainly came from temporary income improvements driven by a surge in tax refunds, rather than a substantive strengthening of the household sector. As real cash flows stagnate, real consumption growth in the second half of the year is expected to slow to 1%-1.5%, with overall economic growth likely slightly below potential levels.

Risks to consumption forecasts are also skewed to the downside. The Strait of Hormuz remains closed, and if gasoline prices rise again, the impact will fall concentratedly on low- and middle-income households. Corporate investment remains strong, and the wealth effect from the earlier stock market rally will laggingly support GDP, but it will be difficult to offset the drag from the consumption side.

Declining Unemployment Rate Masks Substantial Weakness in the Labor Market

Surface data appears contradictory: the U.S. unemployment rate fell from 4.5% last December to 4.1% this July, which does not directly support the narrative of "weakening employment." However, the report points out that this decline should not be interpreted in the usual way.

Both non-farm payrolls and household survey employment showed month-over-month declines in July. Estimated potential trend employment growth has dropped to about 5,000 per month, far below the balanced employment growth rate of about 50,000 needed to stabilize the unemployment rate. If a similar pace continues in the coming months, the previous decline in the unemployment rate is likely to be partially reversed.

The key is that the driving force behind the decline in the unemployment rate is mainly a drop in the labor force participation rate, rather than an increase in the employed population. The decline in the employment-to-population ratio is reflected in both the overall data and the version adjusted for age structure changes. Meanwhile, wage growth remains weak, further weakening the basis for the judgment that "the labor market is tightening."

July Inflation Reading Artificially High; Core PCE Trend Not Reversed

Over the past two months, U.S. inflation has generally shown an improving trend. Core PCE rose by 0.13% month-over-month in June and is estimated at 0.20% for July. The July reading appears slightly higher, but Goldman Sachs points out that more than half of the increase comes from the sub-category of portfolio management services. The measurement method for this sub-category is itself controversial—when asset sizes expand and management fees charged at a fixed proportion rise accordingly, most people do not consider this a price increase. Furthermore, this sub-category is expected to undergo a significant downward revision by the end of September, consistent with its historical pattern of repeated revisions.

Other temporary inflation factors such as tariffs, software and accessories, and energy prices are also on a path of dissipation. The overall path of core PCE inflation approaching 2% by 2027 has not changed due to the single-month reading in July.

Market Pricing for Rate Hikes is Hawkish; Room for Downward Adjustment in Interest Rate Path Remains

The June dot plot showed that 9 out of 18 FOMC participants who submitted forecasts expected a rate hike in 2026, but based on estimates of voting members, only about 4 to 5 out of the 12 truly favor a rate hike. Three clear dissenting votes appeared at the July meeting, indicating an expansion of hawkish voices.

However, both employment and inflation data have been significantly soft over the past two months. Under this data combination, it is highly unlikely that dovish members will turn to support a rate hike, thus raising the threshold for a September hike very high.

At the asset pricing level, Goldman Sachs' path assumptions form a relatively consistent indication in several directions: improving inflation and declining hike premiums, coupled with fiscal concerns, jointly point to a further steepening of the U.S. Treasury yield curve; strong Q2 corporate earnings and stabilization of AI trades have pushed major stock indices to new highs, and the upward path before year-end remains valid; in foreign exchange, mild global inflation overall favors the continuation of strength in high-yield currencies, with the USD maintaining an advantage against the CAD, and the EUR against the CHF.

ECB May Hike by 25 Basis Points in September, but Next Step More Likely a Cut

The macroeconomic difficulty in Europe lies in the fact that energy prices remain high, while core inflation is only mildly above target. Under this combination, Goldman Sachs maintains its base case judgment that the European Central Bank will hike rates by 25 basis points in September, but also points out that the next action after this hike is more likely to be a rate cut, with the timing falling around mid-2027.

Regarding political risks, the French 2027 presidential election has begun to enter market view. The first round of voting is scheduled for April 18, 2027, and the runoff between the top two candidates will be on May 2. Models based on polls show that Marine Le Pen currently has about a two-thirds probability of winning the presidential election. The composition of the runoff opponent is crucial: if she faces former Prime Minister Edouard Philippe or another centrist candidate, the second round will still be competitive; if the opponent is Jean-Luc Melenchon, Le Pen is almost certain to win. In current first-round polls, Philippe is in second place and Melenchon in third, but the latter has a precedent of outperforming polls historically.

It is worth noting that there is a structural decoupling between European stocks and European economic fundamentals. The automotive sector accounts for only about 1% of market capitalization, limiting its drag on stock indices; rising oil prices are unfavorable for European GDP but beneficial for index performance, as oil and gas producers have a large weight in the Stoxx 600. In the first half of this year, Stoxx 600 earnings per share grew by 14%, while nominal GDP growth during the same period was only 3.3%, and real GDP growth was just 0.7%. Over the past 18 months, the Stoxx 600 has outperformed the S&P 500; since 2022, European bank stocks have significantly outperformed U.S. mega-cap tech stocks. The report believes that current European valuations remain reasonable, and the Stoxx 600 has the conditions to continue outperforming.