Product prices are as shown on Walmart.
Courtesy: Walmart
Tuesday’s news was supportive of inflation, with investors hoping for better conditions on Wednesday when the Labor Department releases its Consumer Price Index report for July.
As the score declines, continuing to confirm that early-year price increases were either a fluke or a last-minute sign of inflation, a positive CPI reading could mean the Fed will turn its sights to other economic challenges, such as a slowing labor market.
“Right now, the inflationary pressures that we’re seeing have really dissipated significantly,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “Inflation is hardly an issue right now. There’s a general consensus that the worst is over. ”
Like others on Wall Street, Baird expects the Fed to shift its focus from Tightening policy to combat inflation take an easier stance to block potential The employment situation is weak.
While consumers and business owners continue to express concerns about high prices, The trend has indeed turned. Tuesday’s producer price indexJuly’s PPI report helped confirm optimism that the inflation numbers that started in 2021 and surged again in early 2024 are a thing of the past.
The PPI report, considered a measure of wholesale inflation, showed prices rose just 0.2% in July, up about 2.2% from a year earlier. This number is currently very close to the Fed’s 2% target, indicating that the market’s impulse for the Fed to start cutting interest rates is about to reach its target.
Economists polled by Dow Jones expected the CPI’s all-item reading and the core measure excluding food and energy to rise 0.2%. However, 12-month interest rates are expected to be 3% and 3.2% respectively, well below the highs in mid-2022 but still far from the Fed’s 2% target.
Still, investors are keeping an eye on the Fed’s September meeting Start cutting Given that inflation is waning and the labor market is weakening, interest rates are falling as well. The unemployment rate has now risen to 4.3%, an increase of 0.8 percentage points over the past year, raising a time-tested recession flag. Sam’s Rules.
“Given the concern about the relative softness in the labor market, it would be surprising if the Fed didn’t start to ease policy, given that inflation is falling rapidly and I expect that to continue in the coming months. Very soon, probably at the September meeting,” Baird said. “If they don’t do that at the September meeting, the market won’t take kindly to it.”
Concerns about Fed’s slow response
Weekly short airport pick-up First time filing for unemployment benefitsCombined with other weak economic indicators, some in the market briefly sought an emergency rate cut.
While that sentiment has dissipated, concerns remain Fed’s pace of easing is slowjust as inflation is slow to tighten when it starts to escalate.
Tom Porcelli, chief U.S. economist for fixed income at PGIM, said another benign inflation report “gives the Fed complete reassurance that they can turn their attention from inflation to labor.” “They could have turned their attention from inflation to labor months ago. Cracks are forming in the labor market backdrop.”
Amid the twin realities of declining inflation and rising unemployment, the market has digested the absolute certainty of an interest rate cut at the Federal Reserve meeting on September 17-18. The only remaining question is the extent of the rate cut. Futures are pricing in a broad split between a quarter- or half-percentage drop, and the possibility of a full percentage-point drop by the end of the year. CME’s calculations.
However, futures pricing has been off target for much of the year. Traders started the year expecting rapid rate cuts, but then switched to expecting just one or two cuts before the latest swing in the other direction.
“I’m as curious as anyone about (Wednesday’s) inflation report, but I think it would take a real outlier to change the Fed’s tone: 1) shift to a focus on labor and 2) seriously consider a rate cut in September,” Wave said. Arcelli said. “They should start aggressively. I could easily make the case for the Fed to cut rates by 50 basis points just to get the ball rolling because I think they should have already cut rates. I don’t think they’re going to do that. They’re going to start modestly.”
