Here’s what you should keep an eye on in the coming days:

August Consumer Price Index (CPI): Coming out on Wednesday, this key measure of inflation will show if price pressures are cooling off or sticking around.

Producer Price Index (PPI): On Thursday, the PPI, which reflects wholesale inflation, will give us a sneak peek at what might be coming next for consumer prices.

The Cooling Labor Market

Lately, we’ve seen clear signs that the U.S. labor market is slowing down, but it’s still uncertain if this is just a natural adjustment or an early warning of a possible recession. In August, only 99,000 private sector jobs were added—the slowest pace since January 2021—and job openings dropped to 7.67 million, the lowest we’ve seen since early 2021. Hiring plans have also dropped by 41% compared to last year, and there were 75,891 job cuts in August, the most since 2009 (outside of the pandemic). Overall, job growth is down to 1.5% per year, which is below the historical average.

The "yield curve" a common recession indicator, is giving us mixed signals. The inversion between the 10-year and 2-year Treasury yields flipped back to positive territory—this shift has traditionally come several months before a recession hits. But the 3-month to 10-year yield inversion is still holding, and this may continue unless the Fed makes some significant rate cuts. Even with small cuts (say 0.25% or 0.50%), the inversion might not fully reverse unless we see deeper reductions in rates.

While some people are expecting rate cuts in the upcoming Fed meeting, a modest cut likely won’t be enough to flip the yield curve. If the Fed opts for deeper cuts, it might signal clearer recession risks ahead. Many are forecasting a total of 100 basis points (bps) in cuts by the end of this year, though the exact timing remains uncertain.

Bond Prices and Mortgage Rates: Concerns about a recession have driven up bond prices because investors are betting on the Fed cutting rates by more than 1% this year and even more into 2025. Remember, mortgage rates were at 4% when the Fed rate was 2%. There’s still a long way to go, but the bond market is already pushing rates lower based on their expectations for future Fed policy. Waiting for rates to drop might not be the best strategy. The smart move is to buy when you’re in a good financial position to do so.

Key Data to Watch

Jobless Claims: On Thursday, we’ll also get an update on initial and continuing jobless claims, which will give us another read on how strong (or weak) the labor market is—something the Fed pays close attention to when deciding on rates.

Additionally, a couple of important Treasury auctions will likely influence mortgage rates:

- 10-Year Treasury Note Auction: On Wednesday, this one is closely tied to mortgage rates.

- 30-Year Bond Auction: On Thursday, the outcome of this auction could also affect long-term borrowing costs, including mortgages

Inflation and Money Supply

For the third month in a row, the Fed’s preferred inflation gauge (Core PCE) has held steady at 2.6%. While this is still above the 2% target, it’s low enough that markets are expecting a rate cut in September.

One of the reasons inflation has come down over the past couple of years is due to what’s called “sound money” practices. After a massive 40% increase in the U.S. Money Supply (M2) during 2020-21, it’s since dropped by 2% since early 2022. Although it has risen slightly by 1.3% over the last year, it’s still well below the average growth of 6.9% we’ve seen since 1960.

When the money supply grows quickly, as it did in 2020-21, you end up with more money chasing the same amount of goods and services, which leads to inflation. The Fed responded by raising interest rates to slow down borrowing, reduce spending, and bring inflation down. But now that the money supply is growing at a slower pace, inflationary pressures have eased, giving the Fed more room to cut rates to stimulate economic growth.

Rate cuts help with housing affordability, but they are mainly intended to keep the economy from slipping into a recession. When money becomes cheaper to borrow, it boosts business activity and consumer spending, which supports growth when inflation is under control. Lower rates are great, but be ready for the increased competition that tends to come with them.