Wall Street strategists at influential investment giants are starting to recommend buying inflation hedges for 2025.
That means, at the moment, buying at the short-term end of the Treasury market–like 3-month to 12-month bills–and selling at the long-end–like 10-year notes.
Expect a make or break inflation report on Friday. Make or break that is for the possibility of an initial interest rate cut at the Federal Reserve’s September 18 meeting.
After today’s surprisingly strong May jobs report, the odds for an initial interest rate cut from the Fed at its September 18 meeting weakened considerably
Employers added 272,000 jobs in May, the Bureau of Labor Statistics reported this morning. That number was well above the 185,000n projected by economists and even higher above the 175,000 in the April report. The financial markets were disappointed with the news since it pushed out the schedule for an initial interest rate cut from the Federal Reserve.A cut a the July 31 Fed meting has now been priced out by the market. The Standard & Poor’s 500 fell 0.14% today and the NASDAQ Composite dropped 0.23%
The Federal Reserve has been telling us over and over again that it’d decision on cutting interest rates depends on the data. Among other things, the Fed wants to see a steady slowdown in the employment market reflected in the data before it cuts interest rates. But what if the data have been wrong? For months? Today in its regular Quarterly Cent of Employment and Wages the Bureau of Labor Statistics raised just that possibility.
Be careful what you wish for. Financial markets have been hoping to see signs of a slowing U.S. economy that would let the Federal Reserve begin to cut interest rates. But after the Institute for Supply Management’s (ISM) manufacturing gauge fell 0.5 point to 48.7 in May, the weakest in three months, in data released on Monday, investors have begun to worry if this much of a slowdown is a good thing.
Don’t expect inflation worries to go away. One thing that is keeping inflation worries at full boil is the problem of understanding why inflation has stayed higher than expected for so long. Has something fundamentally changed in the economy? And could that keep inflation higher than expected for longer than now expected? The answer according to a new and disconcerting study from the Cleveland Federal Reserve Bank is “yes.” The inflationary impacts from pandemic-era supply chain shocks have largely resolved and the remaining forces that are keeping inflation elevated are “very persistent,” Cleveland Fed economist Randal Verbrugge wrote in a report released on Thursday. Inflation may not return to the U.S. central bank’s 2% target until mid-2027.
The Federal Reserve’s preferred measure of U.S. inflation–the core personal consumption expenditures (PCE) price index, which strips out volatile food and energy prices–rose 0.2% in April from March.That was the smallest advance in 2024, according to Bureau of Economic Analysis data out Friday. And there was more evidence of a slowing economy today.
I expect Wall Street’s last rate cut bulls to get gradually less bullish. With means, expect to see interest rates (and Treasury yields) continue to rise, and the consensus on when the first cut in rates from the Federal Reserve to continue to move later in 2024. This past week economists at Goldman Sachs threw in the towel on their projections for a July interest rate cut by the Federal Reserve. The investment company moved its forecast for an initial cut to September.“Earlier this week, we noted that comments from Fed officials suggested that a July cut would likely require not just better inflation numbers but also meaningful signs of softness in the activity or labor market data,” the economists wrote in a note.Goldman Sachs had been one of the last banks on Wall Street betting the Fed would start lowering interest rates in July. JPMorgan Chase and Citigroup are among the few holdouts still forecasting a July move. Goldman is still predicting two interest rate cuts in 2024. The swaps market now fully prices in a December cut. The odds of a second reduction in 2024 stand at less than 30%, compared with about 70% last week. At the end of 2023, the first Fed cut was expected as early as March.
Today’s video is The Uncertainty of Uncertainty in the Stock Market. Right now we’re seeing uncertainty on top of uncertainty. The CPI numbers just came out and April showed a slightly lower annualized inflation rate than March. The market took this as a signal that we’ve moved past inflation stagnation and have resumed the march towards 2%. This is, of course, an uncertainty. Another uncertainty is the what we don’t know about the inner thinking at the Fed. How much of a decline does the Fed really need to see to start cutting rates? Right now, according to the CME Fedwatch tool, there is a 70% chance that we’ll see interest rate cuts at the September Fed meeting. This prediction has shifted a lot in the last few months and could continue to shift. These uncertainties mean that the market may be fully priced at 5,200. Some analysts suggest we could hit 5,600 by the end of the year, making it a 15-20% year. In the short term, it’s really hard to predict how people react to all these layers of uncertainty. It’s also difficult to hedge this market so I recommend looking at individual stocks in lithium or copper that will continue to go up, even if the market as a whole doesn’t move.
Today, May 15, the April Consumer Price Index report dangled new hope in front of investors. The all-items index annual rate of inflation dropped to an annual 3.4% rate from 3.5% in March. The core index, which leaves out food and energy prices, fell to an annual rate of 3.6%, down from 3.8% in March. Those annual rates are still way above the Federal Reserve’s inflation target of 2%. But after three straight reports where the inflation rate came in above market expectations todays report, which hit projections right on the mark, came as good news. In recent weeks Wall Street has speculated that inflation is set to resume its downward course starting with the April report. And after stalling above 3.5%, annual inflation would resume its downward path.
Granted that the remarks weren’t delivered at the most high profile venue–a panel discussion at the Foreign Bankers Association meeting in Amsterdam–but I read Federal Reserve chairmen Jerome Powell as saying that the U.S.central bank might hold interest rates steady for longer than now expected by WallStreet. Ahead of new inflation data from the Consumer Price Index for April due tomorrow, anyway. On the day before the meeting economists were expecting the annual inflation rate at both the all-time and core levels to have dropped by 10 or 20 basis in April
