The threat of further rate hikes from the Fed continues to hang over the stock market like a wet blanket. The markets are discounting the odds at 12% for a +25 bp rate hike at the September 20 FOMC meeting and 37% for that +25 bp rate hike at the November 1 FOMC meeting.
The stock market is not likely to release to the upside until there is no threat of another rate hike, the chances recede for a fresh banking crisis, and there is virtually no chance of U.S. recession.
There was at least an improvement in inflation pressures in today’s PCE deflator report, which is the Fed’s preferred inflation measure. Inflation is the number one factor in the Fed’s decision on whether it will continue to raise interest rates. The Fed must get inflation back down towards its 2% inflation target in order to prevent a burst of concern in the bond market that the Fed has lost its nerve.
The best news in today’s July PCE deflator report was that the deflator on a 3-month annualized basis fell to post-pandemic lows of +2.1% for the nominal deflator and +2.9% for the core deflator. Today’s core deflator report of +2.9% on a 3-month annualized basis was still well above the Fed’s +2% inflation target, but was down sharply from 4-decade high of +6.7% posted in June 2021 as the pandemic forced prices sharply higher. The 3-month annualized deflator figure looks at inflation just over the past three months, and then annualizes the figure.
There was also good news in the deflator report since both the nominal and core deflator rose by only +0.2% m/m and showed the smallest back-to-back increases since late 2020.
The deflator report showed some backsliding on a year-on-year basis, but not by enough to cause any major concern. On a year-on-year basis, the July PCE deflator report of +3.3% was up from June’s 2-1/4 year low of +3.0% but remained far below the 4-decade high of 7.0% posted in June 2022. Meanwhile, the Jul core PCE deflator of +4.2% was up from June’s 1-1/4 year low of 4.1%, but remained far below the 4-decade high of +5.4% posted in Feb 2022.
The markets are hoping that U.S. inflation pressures will continue to ease in the coming months, allowing the Fed to conclusively end its aggressive rate-hike regime, perhaps leading to a sustained rally in stocks.
On the date of publication, Rich Asplund 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.
