Investors are confident that the Federal Reserve will cut interest rates by the end of its meeting in September.
As of Tuesday morning, markets were pricing in a 100% chance of a rate cut in September, According to CME FedWatch TooNo, up from 70% a month ago.
The increased confidence comes after a better-than-expected reading for June inflation, along with signs of further slowdown in the labor market. In short, economists and investors alike have taken the data to mean that the Federal Reserve will start cutting interest rates once inflation approaches the Fed’s 2% target.
“Recent data have shown continued weakness in the labor market and a significant slowdown in inflation pressures, particularly in the all-important shelter category. These developments are expected to weigh materially on the outlook for monetary policy,” Matthew Luzzetti, Deutsche Bank’s chief U.S. economist, wrote in a July 12 research note that included expectations for a September rate cut.
Federal Reserve Chairman Jerome Powell said Monday that recent data has added “somewhat” to the central bank’s confidence that inflation is coming down to its target. However, the Fed chief declined to specify exactly what that means for when the central bank will cut interest rates.
“I will not send signals about any particular meeting. We will make these decisions meeting by meeting based on evolving data and the balance of risks,” Powell said. During the interview At the Economic Club of Washington.
Regardless of the exact timing of the rate cut, investors now feel confident that the future path of interest rates is lower. More confidence that these cuts will come soon has led to a broad rally in the stock market.
The market’s most popular sectors over the past year have performed weaker than expected as investors shift to sectors outside of technology.
The Roundhill Magnificent Seven ETF, which tracks the group of large-cap technology stocks that have led the stock market rally in 2023, has fallen more than 3% in the past five days. Meanwhile, real estate (XLRE) and industrials (XLI), both of which are sensitive to interest rates, have been the market’s biggest gainers over the same time period, rising about 5%.
The Russell 2000 (RUT) Small-Cap Index rose more than 10%. Finally broke its highest level in 2022 For the first time during the current bull market.
“If this trade continues, and if the possibility of a rate cut this fall remains, then we may finally see the bulls wake up, which is good news for all investors,” Kali Cox, chief market strategist at Ritholtz Wealth Management, told Yahoo Finance on Monday.