Inflation cools but fails to satisfy Wall Street

The recent step up in the markets implied probability of a 50 basis point cut this week, rather than 25 bps, has made it the most likely outcome in traders’ opinion.
It was not a function of new data or a changed view of the Federal Reserve’s risk mitigation mindset.
Rather, it’s…

— Mohamed A. El-Erian (@elerianm) September 16, 2024

The Consumer Price Index report released Wednesday showed inflation cooling to its lowest level since early 2021, but not enough to satisfy Wall Street’s hopes for a larger interest rate cut from the Federal Reserve next week. The CPI rose 2.5% over the prior year in August, a deceleration from July’s 2.9% annual gain. Core CPI, which excludes volatile food and energy prices, maintained the same level as July, primarily due to a 0.5% rise in the index for shelter. Stocks dropped sharply following the report before recovering slightly by mid-morning.

JPM DESK:

.. the US Consumer continues to outperform all expectations .. However, with the Cleveland Fed’s real-time inflation forecast at 2.27% for September (2.07% PCE), compared to 2.5% official CPI for August, the Fed may view inflation as solved and thus Fed Funds is too… pic.twitter.com/D58IKEs4iX

— Carl Quintanilla (@carlquintanilla) September 18, 2024

Jeffrey Roach, chief economist for LPL Financial, said, “Given the stickiness of services inflation, the Fed will likely cut by 25 basis points in the upcoming meeting and reserve the potential for more aggressive action later this year if we see further deterioration in the job market.”

Impact of Fed rate cut on stock market: DECODED by Nikunj Dalmia | Editor's Takehttps://t.co/pfr0VOpzov

— ET NOW (@ETNOWlive) September 18, 2024

Inflation has been decreasing slowly since the second quarter, now rising at 3.2% in August and July compared to higher rates earlier in the year. Gina Bolvin, president of Bolvin Wealth Management Group, said, “Today’s inflation data cemented a 25 basis point cut next week. A 50 basis point cut is out the window.” Investor bets on a 25 basis point rate cut rose to 85% following the CPI report. The Fed, set to meet on Sept. 17 and 18, is now highly focused on the job market as it has weakened. Fed Chair Jay Powell noted that his confidence has grown that inflation is on a sustainable path back to 2% and that the Fed does not “seek or welcome further cooling in labor market conditions. Most analysts believe the last jobs report for August was not weak enough to justify a 50 basis point rate cut. However, downward revisions for jobs added in July and June were concerning, indicating that if the job market weakens further, the Fed could consider larger rate cuts.

Inflation’s effect on market expectations

The Dow ended Wednesday about 124 points higher, or 0.3%, after plunging by as much as 700 points earlier in the day. The S&P 500 gained around 1% while the Nasdaq Composite added 2.2%. Large market swings like these are not unusual for September, which has historically been volatile for stocks. Investors are also likely weighing the prospect of Vice President Kamala Harris‘ chances in the presidential election after Tuesday night’s debate. Harris’ economic proposals include raising the corporate tax rate to 28% from the current 21%, which could raise costs for businesses and impact profit margins. Tech shares boosted the S&P 500 and Dow to their biggest comeback in two years, with the Nasdaq Composite marking its best day since Aug. 15. Gains by big tech names such as Microsoft, Alphabet, and Nvidia contributed to the rebound. Treasury yields rose in a volatile day following the Trump-Harris debate and August inflation data. The 10-year yield gained 0.010 percentage point to 3.653%, and the two-year rose 0.035 percentage points to 3.643%. Oil futures also rose as Hurricane Francine caused some U.S. offshore production to be shut in, with WTI settling up 2.4% at $61.31 a barrel and Brent rising 2.1% to $70.61 a barrel.