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The stock market had a good showing Tuesday, motivated by some pleasing producer inflation data that supported the market's notion that the Fed is on track to cut the target range for the fed funds rate at the September FOMC meeting.
That notion includes no question that it will be a 25 basis points reduction. The question -- in the market's mind anyway -- is whether it will be a 50 basis points reduction.
The Fed, of course, isn't pre-committing to any move; however, with the jump in the unemployment rate to 4.3%, a manufacturing sector in contraction, ample anecdotal evidence pointing to pressures on consumer spending, and a continuing trend of disinflation toward the Fed's 2% goal, the rate-cut writing is seemingly on the wall.
All things considered, we would label the July Consumer Price Index (CPI) a relatively pleasing inflation report as well. It was perhaps just not as pleasing as some market participants calling for a 50 basis points rate cut would have preferred.
Total CPI was up 0.2% month-over-month in July, as expected, and core-CPI, which excludes food and energy, was up 0.2%, also as expected. The index for shelter was up 0.4% month-over-month and accounted for nearly 90% of the increase in the all items index.
On a year-over-year basis, total CPI was up 2.9%, versus 3.0% in June, and core-CPI was up 3.2%, versus 3.3% in June.
The key takeaway from the report is that it points to ongoing disinflation; hence, it won't change the market's belief that the Fed will cut rates by 25 basis points in September even though CPI inflation is comfortably above the Fed's 2% goal, which is oriented around PCE price inflation that is currently at 2.5%.
Notably, the all items index less shelter was up just 1.7% year-over-year on an unadjusted basis in July.
The fed funds futures market is comporting with the smaller rate cut view. Just like yesterday, there is a 100% probability of a 25 basis points rate cut in September, yet the probability of a 50 basis points rate cut following the CPI report has been reduced to 43.5% from 53.0%, according to the CME FedWatch Tool.
The Treasury market's initial reaction also seemed to comport to this perspective, as yields went up on what was essentially an in-line report. The 2-yr note yield, which is more sensitive to changes in the fed funds rate, went from 3.93% to 3.99% and is now at 3.97%. The 10-yr note yield went from 3.83% to 3.86% and is now at 3.85%.
The equity futures market also saw some knee-jerk selling interest, but it has settled down and is back to signaling a mixed and flattish open, much like it was before the release when it was also digesting the news that Mars is going to buy Kellanova (K) for $83.50 per share in cash, Elliott is launching a proxy fight for board seats at Southwest Airlines (LUV), Japan's Prime Minister Kishida is stepping down in September, and the Reserve Bank of New Zealand unexpectedly cut its key policy rate by 25 basis points to 5.25%.
Currently, the S&P 500 futures are up seven points and are trading 0.1% above fair value, the Nasdaq 100 futures are up 29 points and are trading 0.2% above fair value, and the Dow Jones Industrial Average futures are up 10 points and are trading fractionally above fair value.
