Odds for a September rate cut just spiked

Unemployment is up, job creation is down, and markets are changing Fed bets

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Good morning! We have a packed week for markets ahead:

  • Tuesday: Jerome Powell testifies

  • Wednesday: Monthly oil report from OPEC+

  • Thursday: June CPI report

  • Friday: June PPI report and Michigan Consumer Sentiment

Plus we’ll see nine total Fed officials speaking and key earnings from big banks including JPMorgan and Wells Fargo.

One way or another, all of the above will influence what the Fed does with interest rates in September.

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A budding case for September cuts

The Fed’s case for cutting interest rates seems to get clearer every data dump.

This time last week, markets saw roughly coin-flip odds for a September rate cut.

After Friday’s jobs report, that spiked above 72%. 

While the US economy continues to add jobs every month, the rate of growth is tapering off. Employers added 206,000 jobs in June, according to the Bureau of Labor Statistics, down from 218,000 in May. 

Notably, the official numbers for April and May were revised lower by a combined 111,000, undercutting some of the belief that the labor market remains robust.

And the unemployment rate came in higher than expected at 4.1%, marking the first time in 30 months above 4.0%.

Meanwhile, hourly earnings climbed 3.9% compared to the same time last year, good for the lowest mark since June 2021.

The latest unemployment figure revived chatter of the Sahm Rule, a longstanding recession indicator that is nearly flashing.

Market lore says when the three-month moving average for the unemployment rate rises 0.5% or more relative to the low point of the prior 12 months, a downturn follows. 

“We are in a slowing economy,” said Wharton professor Jeremy Siegel. “I think it’s really time for Fed Chairman Powell to tee up in the July meeting a cut in September, and maybe another one in November.”

Without a September cut, in Siegel’s view, the Fed is in danger of triggering a recession.

As noted above, two critical inflation reports are due this week:

  • Thursday: June CPI 

  • Friday: June PPI 

Markets and policymakers will be dialed in on the former. Consensus estimates see CPI rising 3.1% annually, which would be the lowest print in five months and the third month in a row of cooling inflation. 

If that forecast holds true, the Fed would be that much closer to its soft-landing scenario — so long as it doesn’t make a policy error by being too late with cuts.

“Certainly September is very much in play for a first Fed rate cut,” ING chief international economist James Knightley wrote in a note. 

His team calls for three cuts before the end of the year, above the market expectations for two.

Knightley again:

“Our concern is that business surveys are pointing to intensifying weakness in the months ahead — both in terms of cooling economic activity and weaker job creation — and this may lead the Fed to cutting rates more rapidly.”

How many rate cuts do you expect this year?

A. Zero
B. One
C. Two
D. Three or more

Hit reply to this email or let me know on X @philrosenn.

*At a glance:

*Data as of Sunday 11:15 p.m. ET

Elsewhere:

🟩 Stocks are coming off a winning week. The S&P 500 closed the five-day stretch nearly 2% higher, while the Nasdaq Composite gained more than 3%. The Dow also ticked up 0.5%. Traders are bracing for two sets of inflation data — CPI and PPI — on Thursday and Friday, respectively. (Yahoo Finance)

📈 Big Tech forecasts keep climbing. Mega-caps like Nvidia and Meta have seen huge rallies this year, but they will fall under scrutiny as earnings kick off. Analysts expect S&P 500 companies to see a fourth consecutive quarter of earnings growth — but it remains to be seen whether companies can deliver the profits and guidance to justify such lofty valuations. (WSJ)

🇯🇵 No rebound in sight for Japan’s yen. The divergent monetary policies of the US and Japan have pushed the latter’s currency to nearly a four-decade low against the dollar. The gap between the country’s bond yields have set up the so-called carry trade for global investors — borrow cash in yen at low rates, exchange it for greenbacks, and purchase high-yield Treasurys. (Barron’s)

🔻 Nvidia stock earned a rare downgrade. Pierre Ferragu, an analyst with New Street Research, lowered his rating on the chip-maker from buy to neutral. The stock is up more than 150% this year, and Ferragu wrote Friday that the stock is now “getting fully valued” with limited upside ahead. (Bloomberg)

Rapid-fire:

  • The commercial real estate slump is weighing on small bank stocks, but shares of larger lenders have gone mostly unscathed (WSJ)

  • The People’s Bank of China just went two months in a row without buying any gold (Bloomberg)

  • A banker at Goldman Sachs kept working in the London office for months after being convicted for sexually assaulting a child (FT)

  • US election uncertainty opens the door for China to make changes on the world stage — particularly with regard to Taiwan (Barron’s)

  • Israel’s central bank is set to hold interest rates steady for a fourth consecutive time (Bloomberg)

  • The small-cap Russell 2000 has climbed a mere 1% this year, compared to the S&P 500’s roughly 17% gain (FT)

  • Shares of Macy’s surged 9.5% on Friday as an investor group upped their buyout offer for the department store chain (WSJ)

Last thing:

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