July 15, 2024
Good morning,
Since last Thursday morning, two significant headlines have energized markets: a lower-than-expected CPI report and a clear rise in former President Trump’s predicted odds of victory. The CPI report reflected lower inflation than expected. Although we expect both, we talked about the likelihood that the signs of inflation falling would lead to signs of slowing in the economy this summer. Yields declined quickly now that a September rate cut has a 95% probability (the next FOMC meeting, July 31, seems too soon for the Fed to cut then, but the following meeting on September 18 is now a lock according to Futures pricing). The equity market’s reaction has been rotation; to buy everything not labeled large-cap tech – small cap and value have rallied hard. The “Trump Trade” making its way through markets is all about Trump tax cuts (good for equities) and higher tariffs (inflationary, not great for bonds). There is some conflict between these two themes; rotation and Trump trade, but it is usually too much to ask for thematic consistency in the feverish market environment we’re in today.
What happens when the fever breaks? For the Trump trade, it’s still a long way to the election and pricing in events next year that will exacerbate the already record deficit seems unlikely. The rotation trade in equities has been strong enough to suggest it will be more than a two-day wonder. However, we are not at the beginning of an economic cycle, just the opposite in all likelihood. The equity rally probably has more time, but the market still has many divergences, and August-September have tended to be the worst two-month period of the market calendar. Rally into the first rate cut still seems like the most probable path ahead.
Be well,
Mike
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