Last week, market risk centered around inflation. The data came in mixed, with the Producer Price Index (PPI) falling well below expectations while the headline Consumer Price Index (CPI) registered slightly hotter than forecast. However, the dataset that truly moved markets was Initial Jobless Claims, which climbed to 263,000—the highest level since October 2021. Although this is a concerning signal for the labor market, both equity and Treasury markets interpreted it as fuel to price in additional Fed rate cuts by year-end.

Looking ahead, next week may bring fireworks. On Tuesday, major economic data hits the tape, including Retail Sales, Import/Export Prices, and Industrial Production. Core Retail Sales expectations remain relatively strong, with consensus pointing to 0.4% month-over-month growth. One important caveat is that retail sales data is not inflation-adjusted, meaning it provides insight into spending trends but not inflationary pressures.

The real spotlight, however, will be on Wednesday when the FOMC delivers its rate decision. Markets are currently pricing in at least a 25-basis point cut. Beyond the policy move itself, the Fed will release its statement on economic conditions and the updated Summary of Economic Projections (SEP). This is where volatility could spike.

Over the past year, the Fed has taken a measured stance, expressing cautious optimism about inflation moving toward its 2% target. Yet, inflation has recently shown signs of reacceleration, pushing the Fed further from its mandate. At the same time, cracks are beginning to show in the labor market—not only in the BLS Non-Farm Payrolls report but also in higher-frequency data such as initial claims.

Against this backdrop, next week’s SEP could reveal a divided Fed with some members leaning toward dovish cuts to support a weakening labor market, while others may push for a more hawkish stance given stubborn inflation.

The coming week will be pivotal for markets. With consumer data testing the resilience of household spending and the Fed forced to reconcile conflicting signals from inflation and labor, traders should brace for heightened volatility. The direction of equities, bonds, and even the dollar may hinge on how unified—or divided—the Fed appears in charting its policy path forward.

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