Good morning, investors. There are a slate of Federal Reserve speeches slated this week, though none will be more scrutinized than Jerome Powell’s at Jackson Hole on Friday. Traders will be looking for further confirmation on a September rate cut — which one longstanding Fed watcher believes could be a mistake.

Against the rate-cut consensus

Wall Street is thrilled about an almost-certain September rate cut, but it’s possible the Fed is still walking into a policy error. 

At least that’s what veteran strategist Ed Yardeni told clients this morning.

The Yardeni Research founder — who actually worked at the New York Fed in 1977 — maintains that the economy is still too strong and inflation too sticky to justify rate cuts.

With growth tracking at 2.5% and services inflation still above 3%, he said easing in September could disqualify Powell & Co. from being taken seriously.

While Opening Bell Daily disagrees with this assessment, Yardeni has held this view all year.

“Suppose the FOMC members ignore my advice again, as seems likely, and vote to lower the FFR at the September 16-17 meeting of the committee,” he wrote in a note Monday morning.

“In that case, they risk a hit to their credibility as inflation fighters.” 

In that scenario, the bond market could attempt to force change on their own if traders believe inflation is still too high.

So-called “bond vigilantes” could offload Treasurys, driving yields higher and effectively tightening financial conditions in the face of policy easing.

A similar outcome unfolded when the Fed cut rates last September.

Despite a jumbo-sized 50-basis-point move lower, the 10-year Treasury yield rose more than a full percentage point, dragging mortgage rates higher with it. 

In effect, borrowing costs went up, not down. 

“The Bond Vigilantes would conclude that it is up to them to maintain law and order in the credit markets now that the sheriff isn’t doing so,” Yardeni said.

To be fair, it may not matter to equity investors in the short-term.

As is, the stock market is in the midst of a rally fueled in part by optimism for rate cuts. 

If the central bank moves ahead as expected — prediction markets overwhelmingly favor a cut — Yardeni said it would fuel a “wild meltup” in stocks.

That said, valuations remain stretched to historic levels, and a cut would balloon them further. 

Meanwhile, the Buffett ratio — which tracks total stock market value to GDP — rose to a record 3.1 last week based on the S&P 500’s forward price-to-sales.

That’s right at dot-com levels. Yardeni said another round of Fed-fueled liquidity would only inflate those numbers further.

“For stock investors,” Yardeni said, “the only problem with meltups is that they are followed by meltdowns.”

Market snapshot

Elsewhere

🇷🇺 Putin agreed to an “Article 5-like” security guarantee for Ukraine. The White House said Russia gave a “concession” that the US could offer protection to Ukraine, though officials noted they remain “a long ways off” from a final peace deal. (CNBC)

📈 US retail sales rose 0.5% in July. The data from the Commerce Department matched consensus expectations. The increase was driven in part by auto purchases, which were up 1.6% on the month. Furniture sales, often considered tariff-sensitive, climbed 1.4%. (WSJ)

🚢 Trade partners are still waiting on clarity. Other countries continue to wait for the US to confirm the “deals” it’s publicly announced. Japan’s trade delegate, for instance, said he wants the US to sign the executive order as soon as possible to mitigate some of the early economic consequences. (Yahoo Finance)

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Rapid-fire

• Major earnings from Walmart, Target, and Home Depot come due this week

• European leaders will join Ukraine’s Zelenskyy to meet Trump in Washington as they seek a peace deal (CNBC)

• Prediction markets see 49% odds that bitcoin surpasses $140,000 before year-end (Kalshi)

• A boom in bespoke ETFs have driven niche, a-la-carte options for investors (Bloomberg)

• University of Michigan’s consumer sentiment survey dipped slightly to start August (WSJ)

• Defense stocks could keep rallying even if the Ukraine war ends, given NATO’s military defense commitments (Fortune)

• Taking stock on my 29th birthday after a packed year (Blog)

Last thing

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About me

📰 I’m Phil Rosen, co-founder and editor-in-chief of Opening Bell Daily. I’ve published books, lived on three continents, and won awards for my journalism, which has appeared in Business Insider, Fortune, Yahoo Finance, Bloomberg and Inc. Magazine.

I write our flagship newsletter to prepare you for each trading day — unpacking markets, economic data and Wall Street with analysis you won’t find anywhere else.

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