TradingKey - Goldman Sachs (GS) Chief Economist Jan Hatzius stated in a research report released on August 16 that investors' expectations for further Fed rate hikes remain "too aggressive." With weakening retail sales and soft employment data compounded by a continued slowdown in inflation, a September Fed rate hike is now "extremely unlikely."

Hatzius said in the report, "Based on our baseline economic forecast, the inflation outlook is more likely to improve further rather than deteriorate. We still believe market pricing for the federal funds rate is overly hawkish."

Traders have pushed back expectations for the Fed's next 25-basis-point rate hike to January next year, whereas a week ago the market was certain of a December hike, signaling that expectations are beginning to loosen. Goldman Sachs, however, assesses that while market expectations have shifted back, the adjustment has not gone far enough.

This assessment is corroborated by several recently released economic data points. Data from the U.S. Department of Commerce on August 14 showed that retail sales in July fell 0.6% month-on-month, the largest decline since May 2025, compared with market expectations of a 0.1% increase. Online sales as well as motor vehicle and parts sales declined by 2.2% and 1.8%, respectively, serving as the main drags.

Employment data also showed weakness. U.S. Department of Labor data showed that nonfarm payrolls decreased by 23,000 in July, far below market expectations of an 80,000 increase, with the May and June figures revised down by a combined 103,000.

Goldman Sachs estimates that trend payroll growth has slowed to about 5,000 per month, far below the roughly 50,000 required to maintain a stable unemployment rate. Average hourly earnings rose 3.2% year-on-year in July, the lowest growth rate in nearly five years.

On the inflation front, U.S. core PCE is expected to rise 0.2% month-on-month in July, higher than the 0.13% in June. The report pointed out that over half of the increase came from controversial subcomponents such as portfolio management services, which are expected to be revised sharply downward by the end of September.

In addition, Goldman Sachs stated that other temporary inflation drivers, such as tariffs, software and accessories, and energy prices, are also receding, and core PCE inflation will gradually fall back to near 2% by 2027.

The report also noted that after two consecutive months of visibly weak employment and inflation data, dovish officials have little reason to pivot to supporting rate hikes. Consumer-side risks are likewise non-negligible; if the Strait of Hormuz remains closed and drives up gasoline prices again, low- and middle-income households will bear the brunt.

The policy-sensitive two-year U.S. Treasury yield has fallen to around 4.1%. Overall, this report adds fresh support to the view that "long-term rates have peaked."

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