Cooling Inflation Reinforces Rate Cut Bets
Stocks Climb After Inflation Drops to 3-Year Low, Boosting Fed Rate Cut Expectations
Rate Cuts in Focus
US stocks ended Wednesday's session on a positive note as investors reacted to the lowest inflation reading in three years, strengthening the case for Federal Reserve rate cuts. The Dow Jones Industrial Average and S&P 500 closed with gains, while the Nasdaq Composite remained nearly flat, weighed down by a drop in Alphabet shares.
Cooling Inflation Reinforces Rate Cut Bets
The Consumer Price Index (CPI) rose by 2.9% year-over-year in July, according to the Bureau of Labor Statistics. This is a decrease from the 3% annual increase recorded in June, marking the slowest pace of inflation since March 2021. The cooling inflation data bolsters expectations that the Federal Reserve will begin cutting interest rates in September.
Market sentiment now firmly supports rate cuts, with the CME FedWatch tool indicating a 65% probability of a 25 basis point cut and a 36% chance of a 50 basis point cut. Jason Pride, Chief of Investment Strategy and Research at Glenmede, noted, "Today's CPI release effectively rolls out the red carpet for rate cuts to begin in September." Glenmede anticipates four rate cuts by the end of the year.
Softening Labor Market Adds to Fed Pressure
The recent softness in the labor market has also contributed to the expectation of near-term rate cuts. July's jobs report showed an unexpected rise in unemployment to the highest level since the pandemic, sparking concerns that the Fed's tight monetary policy might be pushing the economy toward a recession. David Doyle, Head of Economics at Macquarie, emphasized that the combination of cooling inflation and a weakening job market supports the case for rate cuts, with his firm forecasting 75 basis points worth of cuts by year-end.
Alphabet Weighs on Nasdaq Amid Legal Challenges
Despite the broader market's gains, Alphabet's stock fell over 2% on Wednesday, dragging down the Nasdaq Composite. The decline followed reports that the US government is considering breaking up the tech giant after a federal judge ruled that Google’s search business is an illegal monopoly.
Market Outlook: Rate Cuts in Focus
As the market digests the latest CPI data and its implications for monetary policy, attention is now turning to upcoming economic reports. The extent and timing of the Federal Reserve's rate cuts will hinge on future inflation and employment data. Investors will be closely monitoring these indicators as they shape the trajectory of the stock market through the remainder of 2024.
In summary, while the cooling inflation and softening labor market reinforce the likelihood of rate cuts, ongoing legal and regulatory challenges for major companies like Alphabet could introduce volatility. However, the overall outlook for the stock market remains cautiously optimistic, with the potential for easing monetary policy to support further gains.