The Fed is having a good morning. Inflation is decelerating and their goal to deliver a soft landing seems reachable. The main event of the week did not disappoint as inflation relief is on its way and that is making the American consumer a little bit stronger.
US stocks are rallying after inflation decelerated sharply and prompted traders to slash their Fed rate hiking bets. Wall Street is now anticipating a Fed pivot in September as pricing reflects a half-point increase. If inflation continues to drop, the bull-steepening trade will gain further momentum. The Nasdaq has just rallied 20% in 55 days, which is making a lot of traders abandon the idea that this is a bear market rally.
CPI falls below forecast
Inflation decelerated sharply in July as gas prices, airfares, and used car prices posted significant declines. The consumer price index rose 8.5% in July compared with a year earlier, a sharper drop than the 8.7% consensus estimate, and down from the 9.1% year-over-year peak in June. The news was not all good as food and shelter indexes increased. This was a welcomed inflation report as every metric came in below consensus estimates. The core CPI inflation readings dropped sharply on a monthly basis and remained steady from a year ago. Expectations are high for inflation to keep declining as shelter and food inflation normally takes longer to drop.
Trades are growing confident that if the next inflation report on September 13th confirms this softening pricing pressure trend, the Fed may seriously consider a smaller pace of tightening. It is too early to say that the Fed will only raise rates by a half-point in September, but if inflation keeps on cooling sharply the Fed’s dovish tendencies will return. Fed-dated swaps are pricing in less than a full point of hikes over the next two meetings.
It is not a foregone conclusion that the Fed will be much less aggressive with hiking interest rates, but stock traders may remain a bit aggressive here. Gold’s path higher is still there, but it might take a little while longer if equities remain bid for a while.
Bitcoin is hovering around the $24,000 level after inflation eased slightly last month. Bitcoin might rally significantly if this broad risk-on rally continues. The majority of the crypto space is still skeptical of the bitcoin rebound that started in mid-June, but momentum traders may pounce on this opportunity if Bitcoin rallies above the $25,000 level. A bitcoin breakout could target the $28,400 level initially.
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