After a blockbuster jobs report cast doubt over Federal Reserve rate cuts and pushed Treasury yields higher at the start of the month, investors finally caught a break last week.

Although wages are still rising rapidly, the latest inflation reports – the Consumer Price Index (CPI) and the Producer Price Index (PPI) – showed more disinflation than previously anticipated. The 10-year Treasury yield plunged 11 basis points, and mortgage rates fell even more on the news.

The headline CPI in May was unchanged from the prior month. The annual increase in the CPI is now 3.3%, easing from 3.4% in April. Core CPI advanced 0.16% on the month, down from 0.29% in April. Annual core inflation eased to 3.4% from 3.6% in April. The PPI, which measures changes in the selling prices received by domestic producers, fell in May.

The latest numbers suggest the Federal Reserve’s preferred inflation gauge – the Personal Consumption Expenditures (PCE) Price Index – is likely to continue inching closer to the Fed’s two-percent inflation target. This move would represent a faster descent than the Federal Open Market Committee’s (FOMC) own projections. After an uptick in the first quarter, inflation is now moderating faster than expected.

Look out for this week’s updates on retail sales, homebuilder confidence and new construction.

Retail sales are expected to continue to ease. With little or no pandemic excess savings left, inflation fatigue, and the high-for-longer interest rate environment, consumer spending is likely to moderate further. While homeowners with near record home equity and those with a ton of financial wealth – a benefit of rising stock prices – still have healthy balance sheets, younger households, especially renters may be treading water. The latest New York Fed Household Debt and Credit Report indicates rising delinquency rates are more concentrated among younger households – Gen Z and younger Millennials.

With many homes currently under construction and higher mortgage rates throughout most of the previous month, homebuilder confidence and housing starts aren’t likely to rebound this month. Housing inventory is also rising rapidly, putting downward pressure on house prices and rents. Slowing construction sector activity points to a slowdown in economic growth ahead.

The Fed has to balance two risks. With continued upward pressure on wages, cutting rates too soon could feed a reacceleration of inflation but waiting too long could cause the economy to crack under the pressure of high interest rates. Several Fed officials will make public comments this week. Expect them to stick to a similar script as that of the Fed chairman during his news conference last week: FOMC participants will need to see more weakness in the economic data before acting to ease policy. Financial markets now expect the rate cutting cycle to begin in September.