Investors are confident the Federal Reserve will probably be lowering rates of interest by the highest of its September meeting.
As of Tuesday morning, markets were pricing in a 100% probability of an rate of interest cut in September, per the CME FedWatch Tool, up from a 70% probability a month ago.
The increased confidence comes after a better-than-expected June inflation reading combined with signs of further cooling throughout the labor market. In sum, economists and investors alike have taken the data to mean the Fed will begin cutting rates of interest soon as inflation falls closer to the Fed’s 2% goal.
“Recent data have showed a continued softening throughout the labor market and substantial cooling in inflation pressures, importantly throughout the all essential shelter category,” Deutsche Bank chief US economist Matthew Luzzetti wrote in a July 12 research note, which included a projection for a September rate cut. “These developments should materially impact the outlook for monetary policy.”
Fed Chair Jerome Powell said on Monday that recent data has added “somewhat” to the central bank’s confidence that inflation is falling to its goal. Nonetheless, the Fed chair declined to specify what exactly meaning for when the Fed will cut.
“I’m not going to be sending signals on any particular meeting,” he said. “We’re going to make these decisions meeting by meeting and the evolving data and the balance of risks.” Powell said during an interview on the Economic Club of Washington.
Regardless of when precisely the cut comes, investors now feel confident that the trail forward for rates of interest is lower. The further confidence that those cuts are coming soon has been driving a broad stock market rally.
Probably the most-loved areas of the market of the past 12 months have underperformed as investors rotate into sectors outside of tech.
The Roundhill Magnificent Seven ETF, which tracks the group of giant tech stocks that led the 2023 stock market rally, is down greater than 3% to this point five days. Meanwhile, Real Estate (XLRE) and Industrials (XLI), each interest rate-sensitive sectors, have been the market’s biggest winners over the an identical time period, rising about 5%.
The small-cap Russell 2000 (RUT) index is up more t 10% and finally breached its 2022 high for the first time throughout the present bull market.
“If this trade continues, if the prospect for a rate cut continues to be in play for this fall, then we could finally see the bull rise up, and that is superb news for all investors,” Ritholtz Wealth Management chief market strategist Callie Cox told Yahoo Finance on Monday.