Bond Yields Sink on Fed Bets as Stocks Hit a Wall: Markets Wrap

(Bloomberg) — The world’s biggest bond market rallied as signs of disinflation reinforced bets the Federal Reserve will cut rates in the next few months.

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Treasury yields tumbled, with Fed swaps projecting more easing in 2024 — and almost fully pricing a Septemberreduction. Equities fell after the S&P 500’s longest rally this year spurred valuation concerns. Some disappointing corporate outlooks also weighed on sentiment. Nvidia Corp. led megacaps down. However, banks rose ahead of the start of the earnings season. And small caps were poised for their best day this year.

The so-called core consumer price index — which excludes food and energy costs — climbed 0.1% from May, the smallest advance since August 2021. The year-over-year measure rose 3.3%, also the slowest pace in more than three years.

“Sticky inflation is coming unglued,” said Michael Feroli at JPMorgan Chase & Co. “We now think this paves the way for a first cut in September (previously November), followed by quarterly cuts thereafter.”

Treasury 10-year yields dropped 10 basis points to 4.19% — with the market also tasked with absorbing a $22 billion sale of 30-year bonds. The S&P 500 fell to around 5,600. The Nasdaq 100 fell 1.5%. The Russell 2000 rose 3.5%. Delta Air Lines Inc. drove an industry selloff on a bearish outlook. PepsiCo Inc. sank on weaker-than-expected revenue growth.

The dollar headed toward its biggest drop since mid-May. Japan’s currency chief stuck with his strategy of trying to keep market players in the dark over whether Tokyo stepped in to prop up the yen following sharp moves.

Wall Street’s Reaction to CPI:

The doves have what they need. It is time to cut.

We’ll see you September! Better-than-expected inflation readings in many key sectors should allow the Fed to start talking about adjusting policy in July — and potentially allow the Fed to act in September.

That said, we still see the Fed wanting to gain further confidence before cutting aggressively unless stress materializes in the labor market.

With another good CPI print under their belt, the window is open for the Federal Reserve to cut interest rates as early as September, and potentially again in December, assuming the inflation data continues to cooperate.

The Fed is in a tug of war with the Treasury, which is spending lots of money and arguably adding to inflation. At the current pace of the inflation slowdown, it may be 6-8 months before we get to the mystical 2% inflation target the Fed is waiting for.

Today’s figures show that the rate of inflation has dropped, compared to last month. This is the latest in a string of data releases that continues to set the stage for the Fed to cut interest rates this year, potentially as soon as September. We expect that this economic optimism will benefit markets.

Ron Temple at Lazard:

A September rate cut should be a done deal at this point. Given the increasing evidence of slowing economic growth, it’s time for the Fed to refocus on the dual mandate and ease monetary policy.

Jason Pride at Glenmede:

These CPI reports are like a tic-tac-toe board, two in a row isn’t enough to claim victory, but it is a significant step forward after a years-long unrelenting inflation force.

The FOMC meeting in September is probably truly “live” in the sense that rate cuts are on the table for serious consideration, setting up the potential for the Fed to cut at each of its three meetings to close out the year, as easing inflation allows it to focus on both sides of its dual mandate.

The cool inflation print, combined with a weakening economy and labor market, indicates that the Fed should cut in July, but probably won’t due to its flawed policy framework and propensity to be behind the curve. We do believe that the Fed will definitely cut by September.

The September Fed cut will usher in a wave of continued central bank cuts which will require a large injection of liquidity into the global banking system. Historically, large injections of liquidity cause rallies in both stocks and bonds.

With abundant signs of a cooling economy, the Consumer Price Index for June certainly constitutes the “more good data” on inflation that Fed Chair Jerome Powell has said we need to see before the Fed can begin cutting interest rates.

This aligns with a September interest rate cut.

Inflation continues to moderate. September cut is a lock I believe.

I’ll argue again though, the battle with inflation is being won but the outcome of the war is yet to be determined and will only be when we have a sustained period of low inflation.

The inflation fight is entering a new phase as the data clearly demonstrate — the economy is cooling and so is inflation.

With a major deficit fight looming in 2025, chances are the Fed will have to be more aggressive than folks currently appreciate.

The Fed will be very pleased with the June CPI report. In fact, inflation was so subdued, FOMC members may start to worry they have kept policy tight for too long.

A 10 basis-point drop in 10-year yields suggest bond traders are not just expecting quick cuts, they are starting to price in more cuts, too.

This will not make July viable — but September looks likely. But beware we still have to bid on a long bond.

Given that the next Federal Reserve meeting is less than three weeks away, the market is currently pricing in that the Federal Reserve will skip that meeting and make their first cut in September.

Maybe more importantly, the market is now expecting three cuts by the end of January 2025. Chair Powell recently said that the risks towards inflation are now more “balanced.” Today’s number reinforces that view and perhaps now tilts the scale towards concerns of a sharper slowdown in the US economy.

Given rising inventories in housing, this sizeable component of the price index is finally starting to give the Fed what it needs to see for rate cuts. Goldilocks is here and a September cut looks more likely than ever.

Our base case is still a half point cut in December but we now think there is a decent chance for a September cut.

The belly of the curve will benefit the most. We really like the 5-year here.

Bret Kenwell at eToro:

When combined with the recent weakness we’ve seen in the labor market, this likely has the Fed readying a rate cut. Some investors may be wondering if a July cut could be in the cards. While that may be too soon for the Fed, a September cut should be the base-case expectation.

Energy and goods both weighed on the CPI results, while the stickier services component has finally started to cool a bit. If this trend continues, it certainly points to lower rates from the Fed, which is still trying to orchestrate a soft landing.

Since the federal funds rate (5.25%-5.00%) remains above nominal GDP growth of approximately 5.0%, we look for two cuts in the coming months to ensure monetary policy gets less restrictive. Beyond that, however, investors should be careful what they wish for…if the Fed cuts much beyond that, it will be because the Fed HAS to cut! That is not an environment conducive for economic or market growth.

Kurt Rankin at PNC:

The June 2024 CPI result brings a September 2024 Fed Funds rate cut into the picture.

Commentary from Fed officials should soon begin leaning toward optimism that their goal of an average 2.0% pace of consumer price growth is attainable, as opposed to recent rhetoric that has been ever wary of risks and pitfalls along the road ahead. And if a few more months’ worth of inflation’s current downward trend can be secured, actions on interest rates will surely follow that rosier talk.

A lot can happen between now and September, but unless most of the numbers pivot back into “hot” territory, the Fed’s reasoning for not cutting rates may no longer be justified.

CPI qualifies as “more good data.”

With Fed officials also apparently getting a little more nervous about labour market weakness, it does strengthen the case for a September rate cut.

One word: pivotal.

With three inflation prints between this morning and September’s Fed meeting, today’s print was crucial in helping the Fed gain confidence inflation is still moving in the right direction.

Cool CPI puts a September rate cut clearly in play.

For the market, clearly the preferred basis for easing rates is predicated on inflationary pressures cooling at a steady pace rather than on an economy losing momentum.

Corporate Highlights:

Delta Air Lines Inc. forecast a quarterly profit short of Wall Street’s expectations as heavy competition in the domestic market drives ticket prices down, dragging the carrier’s shares and pressuring rivals across the industry.
Pfizer Inc. is moving forward with a weight-loss pill as the drugmaker seeks to crack the multibillion-dollar market for obesity medications and mount a comeback from its post-pandemic malaise.
Apple Inc. has avoided the threat of fines from European Union regulators by agreeing to open up its mobile wallet technology to other providers free of charge for a decade.
Costco Wholesale Corp. is boosting its membership fees for the first time since 2017, raising the charge for a basic membership to $65 a year from $60.
Royal Bank of Canada is shuffling its leadership ranks and breaking its largest division into two, in one of the biggest reorganizations of Dave McKay’s decade-long tenure as chief executive officer.
Tata Consultancy Services Ltd. reported profit that topped analysts’ estimates, signaling corporations are resuming spending on projects to take advantage of technologies such as artificial intelligence.