Markets are proving highly sensitive to any new information or announcement that might somehow anticipate the pace at which the Federal Reserve will move in its drawn-out process of normalizing interest rates. This was evident last week when U.S. inflation data for June were released.
Prices rose 3% year-on-year, one-tenth less than expected and three times less than the May increase. In the case of the core register (which excludes food and energy, which are more volatile), it also remained one-tenth below expectations, at 3.3%.
The good news fell like an oasis in the desert, and markets reacted to the possibility that the Federal Reserve might push for faster rate cuts sooner than expected. Investors rushed to buy shares in the stock market and sent Wall Street lower. new record highs. Also, US sovereign debt, which should now yield 4.17% on the secondary market, the lowest figure since March.
This position indicates that the first guaranteed reduction is being discussed at the meeting on September 18, and there is no such possibility on the last day of July. Therefore, the second and last one before the end of the year will take place at the meeting on November 7 or, less likely, on December 18, where a hypothetical third fall is not expected. Thus, by the beginning of 2025, it will increase from the current 5.5% to 5%. In Europe, two reductions are also expected before January, which, together with the one already carried out, will leave the price of money at 3.75%. On the same Thursday, Lagarde’s team will hold its last meeting before the summer, where no changes will be made to the current monetary policy.
Julius Baer explains that “the latest inflation data strengthens the forecast for a rate cut in September, including because the data on the economic downturn and the cooling of the labour market are published, which foreshadows a downward price trend.” “The key point was the monthly increase in core inflation, which amounted to only two tenths,” they add.
“With less than three weeks until the next meeting, the market is pricing in the Fed skipping the meeting and making its first rate cut in September, which now gives it a 100% chance of happening,” estimates Janus Henderson. It should be remembered that Jerome Powell also recently spoke out acknowledging that “inflation risks are now more balanced” and that the fears are now indeed more on the side of a sharp slowdown in the economy.
We also cannot forget that we are living in an election year, which usually indirectly determines the decisions of the central bank governor on duty, who intends not to interfere in them. In this regard, it is a circumstance that the elections will be held on Tuesday, November 5, and the meeting is scheduled just two days later. “The labor market typically experiences a strong seasonal adjustment to the upside in July, and August is usually the most volatile month of the year due to increased business productivity, school closures and summer vacations, so we expect that “the Fed should remain patient and wait” for more data,” they emphasize from Federated Hermes.