CPI Report Indicating Lower Inflation: What to Buy and What to Sell?

After the recent CPI numbers were released, investor sentiment indicated an 85% likelihood of a rate cut at the Federal Reserve's September meeting, up from approximately 70% the prior trading session. This expectation shift has boosted the appeal of gold, as declining interest rates make gold more attractive. Following the release of US inflation data, the dollar fell to a one-month low, enhancing gold's appeal to investors and traders, while the US 10-year Treasury yield dropped to a four-month low. Chairman Jerome Powell suggested that the Fed was nearing a decision on implementing a rate cut if data indicated inflation was trending to their 2 % target.

The question now is, what to buy and what to sell?   

Consider buying stock indexes, gold, and treasuries. At the same time, consider selling the US Dollar. Let's look at some details supporting this idea. 

The US 10-year Treasury note yield experienced a notable decline today, dropping intra-day to 4.168% before closing near 4.20%, marking its lowest level in four months. This contraction was primarily driven by a series of economic indicators suggesting a cooling inflation environment, which bolstered expectations for a rate cut by the Federal Reserve at their upcoming September meeting. June's inflation in the US decelerated to a one-year low of 3%, coming in below the market's anticipated 3.1%. Additionally, the core inflation gauge, excluding volatile food and energy prices, dropped more significantly than forecasted, reaching a level not seen in nearly three years.

These developments reinforced investor confidence that the disinflation trend would persist, bringing inflation closer to the Federal Reserve's target of 2%. As a result, market sentiment shifted, with investors now betting on an 85% chance of a Fed rate cut in September, a substantial increase from the previous session. This growing consensus among investors reflects a broader expectation that the Fed will act to lower borrowing costs to support the economy.

The recent downward revisions to non-farm payroll figures and today's CPI inflation number moving towards the Federal Reserve's inflation target rate further underscored the likelihood of a rate cut. These revisions indicate that job growth in the US economy is slowing, which could prompt the Federal Reserve to take preemptive measures to prevent a further economic downturn. In this context, the declining yield on the 10-year Treasury note can be seen as a barometer of investor sentiment as they lock in current rates, anticipating a more accommodative monetary policy (lower yields) stance from the Fed to sustain economic stability and growth.

Investor Sentiment 

Source: CMEGroup Exchange 

The next Fed meeting on interest rate decisions is on July 31. The sentiment is near 92% that the Fed will leave rates at the current target rate of 525-550 basis points (bps). 

The graph above shows the September meeting expectations for a rate cut and dropping the target rate to 500-525 bps. 

Seasonality 

In recent articles for Barchart, I've written about a dominant seasonal buy pattern for the 10-year Treasury note, stocks and the gold market:

Long-Term Yields Poised to Fall – Lower Mortgage Rates Near

Seasonal Downtrend in Interest Rates Gains Momentum

The Spring Doldrums in The Gold Market May Be Changing Soon 

Stock Market: Will New Quarter Bring New Money?

Seasonal patterns reflect what markets have done historically. Due to their frequency, these seasonal patterns are assigned probabilities. These patterns are not perfect but can be used to screen for opportunities. It's then up to the investor to apply their analytics to enhance or confirm an opportunity during these seasonal windows. 

In my recent articles, I discussed a seasonal pattern for lower interest rates from approximately June to the end of August. This pattern usually results from the Federal Government's fiscal year ending on September 30. 

Market correlations will reveal that lower interest rates are usually bullish for gold and stocks while bearish for the US Dollar. The seasonal pattern charts below highlight that the gold and stock market rallied during the seasonal window for lower interest rates, and the US Dollar declined. 

Moore Research Center, Inc. (MRCI) conducts extensive research to find these seasonal patterns. When multiple markets have a confluence of a 15-year seasonal pattern, I believe they deserve some attention for possible opportunities. 

Source: MRCI 

The first chart shows the 15-year seasonal pattern of the 10-year Treasury note. Notice the beginning of July and the seasonal upmove in prices that has occurred in the past. Higher prices in Treasuries reflect lower interest rates. 

Source: MRCI 

Stocks are usually bullish during declining interest rates. The July seasonal window mirrors the seasonal pattern of 10-year Treasury notes.

Source: MRCI 

As rates fall on Treasury products during the July seasonal window, gold prices have rallied consistently for the past 15 years when yields are dropping, producing less competition for gold investors. 

Source: MRCI 

The US Dollar is more attractive to investors when rates are high or rising. During July, the US Dollar has historically declined as the rates on Treasuries declined and the gold market rallied. 

In Closing…. 

In conclusion, the recent CPI numbers have significantly shifted investor sentiment, with an 85% likelihood of a rate cut at the Federal Reserve's September meeting, up from 70% the prior session. This expectation has boosted gold's appeal, as lower interest rates make it more attractive. The release of US inflation data led to a drop in the dollar to a one-month low and the US 10-year Treasury yield to a four-month low. Fed Chair Jerome Powell hinted that a rate cut could be imminent if inflation trends toward the 2% target.

Investors could consider buying stock indexes, gold, and Treasuries while looking to sell the US Dollar. The 10-year Treasury note yield dropped to 4.168% intra-day before closing at 4.20%, its lowest in four months, driven by cooling inflation. June's inflation slowed to 3%, below expectations, with core inflation reaching a nearly three-year low. These developments reinforced confidence in the disinflation trend, bringing inflation closer to the Fed's target. This led to a shift in market sentiment, with a significant increase in the likelihood of a September rate cut.

Downward revisions to non-farm payrolls and the recent CPI figures support the potential rate cut. Slowing job growth could prompt the Fed to lower borrowing costs to prevent an economic downturn. Seasonal patterns also indicate that lower interest rates are typically bullish for gold and stocks while bearish for the US Dollar. Historical data shows that lower rates align with higher gold and stock prices and a declining dollar from June to August. 

On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.