On Tuesday, the likelihood of an interest rate cut at the September Federal Open Market Committee (FOMC) meeting increased following the release of the July Producer Price Index (PPI), which indicated that inflation is continuing to ease. At the same time, consumer data revealed that many people are struggling financially due to years of high prices.

Last week, the urgency for an emergency rate cut surged in response to a ‘Black Monday’ sell-off that led to a broad decline in asset prices. This market downturn eroded investor confidence, and at one point, the swap market was pricing in a 60% chance of a 25-basis-point emergency rate cut within the next week, as market participants anticipated the Fed might need to take aggressive action to prevent a recession.
 

Analysis from economists

JPMorgan analysts noted that had the Federal Reserve been aware of the rise in unemployment reported by the Bureau of Labor Statistics in early August, they likely would have already enacted an initial rate cut. The data revealed that unemployment increased from 4.1% in June to 4.3% in July, with the number of unemployed Americans climbing to 7.2 million.

Michael Feroli, Chief U.S. Economist at JPMorgan, commented, “If the Fed had received this jobs report before the FOMC meeting last Wednesday, it would almost certainly have cut the policy rate by at least 25 basis points.” He added, “Given that the Fed now appears to be significantly behind the curve, we anticipate a 50 basis point cut at the September meeting, followed by another 50 basis point cut in November.”

Similarly, Citigroup economists Veronica Clark and Andrew Hollenhorst predict that the Fed will implement a total of 100 basis points in rate cuts by November, with an additional 25 basis point cut in December. They also foresee further reductions at subsequent meetings until rates reach the 3% to 3.25% range, which they expect to occur by mid-2025.

And Goldman Sachs economists David Mericle and Manuel Abecasis said that while the Fed should avoid overreacting to one bad jobs report, they do see multiple 25 bps cuts coming as the central bank looks to avoid tipping the economy into a recession.

“It is usually a mistake to infer too much from one jobs report absent a major shock that abruptly changes the picture,” they wrote in an investor note before raising their recession forecast by 0.1 percentage point to 25%. “We changed our Fed forecast after the employment report to include an initial string of three consecutive 25bp (basis point) rate cuts in September, November, and December.”
 

Falling Volatility

The S&P 500 experienced its largest four-day rally of the year, with the Nasdaq 100 gaining 2.5%. Starbucks Corp. saw a 25% jump in its stock price following the departure of its CEO and the appointment of Brian Niccol from Chipotle Mexican Grill Inc. as the new leader. Late in the trading session, Bloomberg News reported that the Justice Department is considering a potential breakup of Alphabet Inc.’s Google.

Wall Street’s preferred volatility index, the VIX, dropped to around 18. Meanwhile, swap traders are anticipating a 40 basis-point cut by the Federal Reserve in September and a total rate reduction exceeding 105 basis points for 2024.

The US producer price index for final demand rose by 0.1% from the previous month, falling short of the 0.2% increase anticipated by economists surveyed by Bloomberg. Looking ahead to Wednesday’s report, analysts predict that the consumer price index and the core index, which excludes food and energy, both increased by 0.2% in July, based on the median forecasts from the Bloomberg survey.