An in-line US inflation report did little to change betting that the Federal Reserve will begin reducing rates in September, and stocks rebounded.
The S&P 500 continued to rise for a fifth day in a row, marking the longest winning run in over a month. Most of its key categories benefited, with shares in the energy, financial, and IT sectors leading the way. Cisco Systems Inc. surged in late trading on a strong revenue estimate. Treasury movements were minimal. The dollar didn’t move from its four-month low.
The consumer price index provided some respite to markets still in shock from last week’s collapse and confirmed the disinflation trend. The Fed is widely anticipated to begin cutting rates next month in response to a weakening labour market; the exact decrease amount will probably depend on new data.
“It may not have been as cool as yesterday’s PPI, but today’s as-expected CPI likely will not rock the boat,” said Chris Larkin at E*Trade from Morgan Stanley. “Now the primary question is whether the Fed will cut rates by 25 or 50 basis points next month. If most of the data over the next five weeks points to a slowing economy, the Fed may cut more aggressively.”
Although the CPI was not ideal, according to Krishna Guha of Evercore, it was sufficient because it agreed with a mild reading on the Fed’s preferred inflation gauge. Furthermore, the central bank has rejected its reliance on data points and is instead considering the larger picture and risk balance.
“This is now a labour data-first Fed, not an inflation data-first Fed, and the incoming labour data will determine how aggressively the Fed pulls forward rate cuts,” Guha noted.
President of the Fed Bank of Chicago Austan Goolsbee stated that the job market is starting to worry him more than inflation.
The S&P 500 remained close to 5,455. Megacaps had mixed results, with Alphabet Inc. down and Nvidia Corp. up. The VIX, which serves as Wall Street’s “fear gauge,” continues to decline and is now at about 16. This comes after an extraordinary surge last week that lifted the gauge above 65.
The 10-year Treasury yield remained relatively stable at 3.84%. 32 basis points of Fed easing in September are factored in by swap dealers.
According to Mark Hackett of Nationwide, one of the things giving stocks a better backdrop is “calming macro fears.” He said that the tension caused by the market drop is a “fading memory.”
The strategists at TD Securities, led by Oscar Munoz and Gennadiy Goldberg, believe that the most recent consumer price report meets the criteria for the Fed to begin reducing interest rates in September.
“Today’s CPI report is again unambiguously welcome news for the Federal Reserve,” they said. “As risks have become truly two-sided for the US economy, if not slightly tilted toward downward employment outcomes, we expect the Fed’s upcoming decision to come down to the magnitude of the first-rate cut.”
The July CPI print is the ultimate “no news, is good news,” according to Chris Zaccarelli of Independent Advisor Alliance, because the markets have been tense and the Fed is eager to decrease interest rates, and nothing in this report should stop them from doing so.
Seema Shah of Principal Asset Management claims that the CPI reading eliminates any last-minute inflationary roadblocks that would have kept the Fed from initiating the rate-cutting cycle in September. However, the figure also points to a lack of urgency for a 50 basis-point reduction.
“It offers little new information to guide the future decisions of the Fed, aside from potentially supporting a rate cut due to job market concerns,” according to Florian Ielpo at Lombard Odier Investment Managers.
“The soft CPI report will likely give Fed officials modestly more confidence that inflation is on the way down,” said Anna Wong and Stuart Paul at Bloomberg Economics. “Even though July’s core PCE inflation print won’t be as good, we expect the Fed to cut rates in September due to the rising unemployment rate.”
With three Fed policy meetings left this year, traders are still pricing in rate reductions of somewhat more than 1 percentage point in 2024. Market pricing had indicated in recent sessions that there was disagreement about whether rates would drop by 25 or 50 basis points the next month.
“The inflation data has been good enough to allow the Fed to start cutting rates in September, but does not give them a reason to cut aggressively,” said Brian Rose at UBS Global Wealth Management. “The decision whether to cut by 50 basis points instead of the usual 25 basis points may come down to the August labour report.”
Rose adds that a decline in consumer spending is the primary danger to his base-case forecast of a soft landing, thus Thursday’s retail sales data is another important release.
“The US economy is sustainably cooling, and the labour market is exhibiting a bit of slowing,” said Neil Sun, a BlueBay portfolio manager at RBC Global Asset Management. “However, we are not overly concerned over US recession risks in the short-term. We stand ready to thoughtfully capitalize on any pockets of volatility should underlying trends of cooling inflation and sustainably slowing US economy continue.”
