Fed Rate Cut Expected – A cut is expected in September, but the size of the cut is unknown

The S&P 500 headed for its fifth straight day of gains, its longest winning streak in more than a month. Most of its major groups advanced, with financials and energy stocks leading the way. Treasury saw little movement. The dollar was near a four-month low.

The consumer price index reinforced the disinflation trend and brought some relief to markets still reeling from last week’s crisis. Combined with a weakening labor market, the Fed is expected to start cutting interest rates next month, while the size of the cut will likely be determined by incoming data.

“It may not have been as cool as yesterday’s PPI, but today’s CPI, as expected, probably won’t rock the boat,” said E*Trade’s Chris Larkin of Morgan Stanley. “Now the big 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 point to a slowdown in the economy, the Fed may cut more aggressively.”

At Evercore, Krishna Guha said July’s CPI wasn’t perfect, but it was good enough because it was in line with a soft reading on the Fed’s preferred measure of inflation. In addition, the central bank has disavowed reliance on data points and is looking at the broader outlook and balance of risks, with downside risks to employment dominating since July’s employment report.

“This is now a Fed with labor data, not a Fed with inflation data, and the labor data coming in will determine how aggressively the Fed will advance rate cuts,” Guha noted.

The S&P 500 was near 5,455. Megacaps were mixed, with Nvidia Corp. up and Alphabet Inc. down. Wall Street’s “fear gauge” — the VIX — continued to fall, falling below 17. This is after an unprecedented peak that took the gauge above 65 last week.

10-year Treasury yields fell two basis points to 3.82%.

“The stress of the market decline is a fading memory,” said Nationwide’s Mark Hackett. “Calming macro fears, rebounding share buybacks and stabilizing momentum provide an improved backdrop for stocks.”

The latest consumer price report “checked the box” for the Fed to start cutting interest rates in September, according to TD Securities strategists Oscar Munoz and Gennadiy Goldberg.

“Today’s CPI report is again unambiguously welcome news for the Federal Reserve,” they said. “As risks have turned really bullish on the U.S. economy, if not slightly tilted to the downside for employment, we expect the Fed’s next decision to come down to the magnitude of the first rate cut.”

For Chris Zaccarelli of the Independent Advisor Alliance, July’s CPI print is “no news, it’s good news” as markets have been on edge and the Fed is trying to cut interest rates — and nothing in this report should discourage them from doing so. so.

“Recent volatility has been largely driven by macro news, and this is a case of ‘boring news is good news,'” said Neil Birrell of Premier Miton Investors. “It also allows the Fed some breathing room as it weighs the economy ahead of their next meeting.”

At Principal Asset Management, Seema Shah says the CPI print removes any lingering inflation headwinds that could have prevented the Fed from starting its rate-cutting cycle in September. However, the number also suggests limited urgency for a 50 basis point cut.

“It provides little new information to guide the Fed’s future decisions, other than to support the potential for a rate cut due to labor market concerns,” according to Florian Ielpo of Lombard Odier Investment Managers.

“The soft CPI report will give Fed officials more confidence that inflation is falling,” said Anna Wong and Stuart Paul of Bloomberg Economics. “Even if July’s core PCE inflation print won’t be as good, we expect the Fed to cut rates in September due to rising unemployment.”

Traders are still pricing in just over 1 percentage point of rate cuts in 2024 with three Fed policy meetings this year. In recent sessions, market prices have shown a split on the outcome of rate cuts of 25 or 50 basis points next month.

“The inflation data was good enough to allow the Fed to start cutting rates in September, but it doesn’t give them a reason to cut aggressively,” said Brian Rose of UBS Global Wealth Management. “The decision to cut 50 basis points instead of the usual 25 basis points may come down to the August jobs report.”

Rose also notes that Thursday’s retail sales data is another critical release, as the main downside risk to his base scenario of a soft landing is a decline in consumer spending.

“The US economy is cooling sustainably and the labor market is showing some slowdown,” said Neil Sun, BlueBay portfolio manager at RBC Global Asset Management. “However, we are not overly concerned about short-term US recession risks. We are prepared to carefully capitalize on any pockets of volatility should the underlying trends of cooling inflation and the sustained slowdown in the US economy continue.”

Corporate highlights:

• UBS Group AG posted a bigger-than-expected second-quarter profit as investment banking income and progress on the Credit Suisse integration helped bolster Chief Executive Sergio Ermotti’s efforts to return capital to shareholders.
• Apple Inc., looking for new sources of revenue, is pushing ahead with development of an expensive tabletop device that combines an iPad-like screen with a robotic limb.
• Southwest Airlines Co. said it remained confident in its current management team after Elliott Investment Management proposed replacing most of the directors on the embattled airline’s board in a looming proxy battle.
• Alaska Air Group Inc. and Hawaiian Holdings Inc. said they would again extend the closing of the proposed $1.9 billion deal to give U.S. antitrust authorities more time to discuss a possible deal.
• Mars Inc. secured the largest debt financing for an M&A in nearly a year to help finance its $36 billion acquisition of Kellanova.

Key events this week:

• China home prices, retail sales, industrial production, Thursday
• US Initial Jobless Claims, Retail Sales, Industrial Production, Thursday
• The Fed’s Alberto Musalem and Patrick Harker speak Thursday
• U.S. housing starts, consumer sentiment from the University of Michigan on Friday
• The Fed’s Austan Goolsbee speaks on Friday

Some of the main movements in the markets:

Stocks

• The S&P 500 was up 0.4% as of 2:58 p.m. New York time
• The Nasdaq 100 was little changed
• Dow Jones Industrial Average rose 0.8%
• MSCI World index rose 0.5%

Coins

• The Bloomberg Dollar Spot Index was little changed
• The euro rose 0.2% to $1.1016
• Sterling fell 0.2% to $1.2831
• The Japanese yen fell 0.3 percent to 147.26 per dollar

Cryptocurrencies

• Bitcoin fell 2.6% to $59,016.51
• Ether was down 1.5% at $2,659.43

BONDS

• The 10-year Treasury yield fell two basis points to 3.82%
• Germany’s 10-year yield was little changed at 2.18%
• Britain’s 10-year yield fell six basis points to 3.82%

commodities

• West Texas Intermediate crude fell 1.4% to $77.23 a barrel
• Spot gold was down 0.7% at $2,447.80 an ounce

This story was produced with the help of Bloomberg Automation.

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