Inflation Drops: Will the Fed Opt for a Big Rate Cut This September?
Inflation Drops: Will the Fed Opt for a Big Rate Cut This September?
Digital Asset Market: Bitcoin (BTC) has recovered to $60,000 after dropping below $50,000 last week. This recovery may be sustained and improved, and it is supported by a decrease in the exchange stablecoins ratio, indicating reduced selling pressure on BTC and possibly signaling a bullish market sentiment. The supply of stablecoins has also increased, suggesting continued fiat inflow into the market. Analysts predict a positive outlook for BTC, with the potential for it to reach the upper range of $67,000-$69,000 in the coming weeks.
In a highly anticipated interview between Elon Musk and former President Donald Trump on X Spaces, bitcoin or crypto was not mentioned despite the high stakes in prediction markets. The interview covered various topics, including illegal immigration, the economy, and AI, but was delayed due to a reported DDOS attack. However, it was a bit of a disappointment for the crypto enthusiasts that the crypto markets did not come up as a topic.
Macro Economics: Most investors are confident that the global economy will achieve a "soft landing" in which inflation subsides, but overall economic activity doesn't significantly deteriorate amid higher interest rates. According to the Bank of America Global Fund Manager Survey, 76% of respondents believe a soft landing is the most likely outcome in the next 12 months, the highest level recorded since May 2023. This confidence is largely driven by expectations for lower interest rates, with 93% of investors expecting them to decrease in the next 12 months. Additionally, 60% of respondents expect four or more interest rate cuts this year, which is in line with current market pricing. While concerns about a potential recession have been raised, many economists and investors believe that a soft landing is still possible as long as the Federal Reserve cuts interest rates by 75 basis points this year.
In other news, China's Huawei Technologies is set to release a new AI chip that will compete with US-based Nvidia and work around the US's export controls. The chip, called Ascend 910C, has been tested by major Chinese companies and is expected to earn $2 billion in orders. This chip will fill the void left by restrictions on Nvidia's chips in China and could further harm the company's market share in the country. Reports also suggest that Huawei's chip has surpassed Nvidia's performance, which is a worry for Washington as it shows that sanctions are not slowing down China's technological advancement.
Equities: US stocks rose on Tuesday, with the S&P 500 and Nasdaq up more than 1% amid cooler-than-expected inflation data and anticipation for an update on consumer prices. The Dow Jones also saw a small increase. This marks the best three-day stretch for the Nasdaq Composite, Nasdaq 100, and S&P 500. Home Depot shares fell after a cut in their outlook, while Starbucks stock surged over 20% as it announced a new CEO. Nvidia stock continued its upward trend with a 5% gain.
The rebound in the market came after last week's decline, with major support from macro hedge funds that are now buying into the market. The uncertain economic outlook until the presidential election in November will keep volatility levels elevated. As a result, there is a higher emphasis on economic indicators, and the event premium for this week's CPI announcement (due August 14 at 8:30 EST) is expected to be high.
The Fed and US Treasury: July's inflation data has come in weaker than expected, providing a positive boost for the stock market and increasing the chances of a Federal Reserve interest rate cut in September. The Producer Price Index (PPI) rose just 0.1% month over month and 2.2% year over year, below economist forecasts. This follows recent economic data, including a slowdown in job growth, that supports the case for rate cuts. Wednesday's release of the Consumer Price Index (CPI) is expected to show a similar trend, with a 3.0% annual increase in headline inflation but a slower monthly increase of 0.2%. Core inflation, which excludes food and gas prices, is expected to rise 0.2% monthly and 3.2% annually. While this aligns with the Fed's benchmark for cutting rates, price growth in areas such as shelter and services could continue to be a concern.
Geopolitical: Israel has shifted its assessment and now believes that Iran is planning a major retaliation against their country in the next few days. This comes after a recent bombing that killed a Hamas leader; tensions are rising between the two countries. Israel's Defense Minister has shared this information with the US, who has responded by deploying military forces, including a submarine and a carrier strike group, to the region. The US spends on each of these Israel defense campaigns runs in Billions of dollars.
In other news, Russian forces have launched a counterattack against Ukrainian troops in the Kursk region, using missiles, drones, and airstrikes to push back the Ukrainian advance. The Ukrainian forces had previously crossed the Russian border, prompting Moscow to evacuate civilians and send in reserves. Russian war bloggers report intense battles, but Russia claims to have repelled many Ukrainian attacks and destroyed numerous tanks and other armored vehicles. This mindless war continues with no win in sight for either side.
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The recent pullback in crypto majors was more intense than initially anticipated, with the market experiencing a sharp decline that exceeded what the underlying causes would suggest. However, the rebound back to $60K was not surprising, as the market quickly stabilized, reflecting the resilience of digital assets. Notably, no significant capital left the digital ecosystem, as stablecoin flows remained consistent, signaling continued investor confidence. This stability suggests that the crypto market is poised for a healthy recovery, even as it continues to be driven by events that trigger short-term sell-offs and rapid rebounds.
At the same time, the financial market is closely monitoring the potential impact of declining inflation on the Federal Reserve's rate-cut decisions this year. With the Consumer Price Index (CPI) set to be released tomorrow, market participants are focused on how these inflationary trends will influence the Fed's actions in the upcoming September meeting. Although a rate cut is widely expected, the key question now is whether the Fed will opt for a modest 25 basis points or a more substantial 50 basis points reduction. The market appears divided on this issue, reflecting the uncertainty surrounding the Fed's approach to navigating the current economic landscape.
In this context, we anticipate a cautious strategy from the Federal Reserve, with a series of three 25 basis point cuts spread across September, November, and December. This gradual approach would allow the Fed to respond to evolving economic conditions while avoiding any abrupt shocks to the market. Interestingly, this measured response aligns with the growing belief that the global economy may have achieved a soft landing—a scenario that seemed highly unlikely earlier this year. If this trajectory continues, it could mark a significant turning point in the post-pandemic economic recovery, with the potential for sustained stability and growth in the months ahead.
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The 1Konto Team
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