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Economists say the Fed's case for rate cuts is about to get stronger

Fresh PCE data is forecasted to hit a three-year low on Friday

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Did you watch the presidential debate last night? A doozy, as anticipated.

Stock futures shot higher during the event, with Biden (📉) and Trump’s (📈) victory odds moving in starkly opposite directions, according to prediction markets.

Today, we’re previewing the Fed’s preferred inflation gauge, SpaceX’s $210 billion valuation, and what Trump would do to market volatility.

Inflation day in focus

The Federal Reserve’s case to cut interest rates is expected to improve this morning.

Economists forecast the overall Personal Consumption Expenditures Price Index (PCE) to continue cool in May to 2.6% year-over-year, down from 2.8% in April. 

Should that estimate hold, it would mark the lowest level for the Fed’s preferred inflation gauge since March 2021. 

“The market is looking for an in-line or better reading to show that inflation is under control and heading toward the Fed’s long-term target of 2 percent,” said Bret Kenwell, US investment analyst at eToro.

“A favorable PCE reading could set the stage for a September cut and potentially put the Fed on track to cut rates more than once this year.”

The core measure — which excludes food and energy prices — is broadly forecasted to ease to 2.6 percent compared to a year ago. 

CME’s FedWatch Tool shows markets see 64% odds of a rate cut coming in September.

The team at Vanguard, however, is not so sure.

They anticipate core PCE to move higher given the recent elevation in transportation and housing costs, which would put pressure on the central bank to postpone easing policy. 

“Structural persistence in shelter price growth, lack of scope for continued progress on goods prices, and services inflation propped up by healthy wage growth will limit the potential for rapidly cooling inflation,” said Vanguard global chief economist, Joe Davis.

BlackRock’s Investment Institute, too, sees inflation running above the Fed’s 2 percent target for the near future due to higher services prices. 

In any case, investors will be looking for more assurance that rate cuts are indeed on the way.

Traders are pricing in between one and two moves lower before the end of the year. 

A hotter-than-expected reading today may tweak that outlook.

To some strategists, it’s still possible that markets aren’t giving enough credence to the possibility of a recession. 

Things have been too good for too long, the thinking goes, and that’s made some participants complacent. 

Mimi Duff, the managing director at GenTrust, believes the odds of a downturn are far higher than the 10% to 25% range seen in various investor surveys.

“We place odds at 65%,” Duff said, “given pandemic-era savings have been spent, and many segments of the economy are likely to be under continued pressure.”

The PCE report is due at 8:30 a.m. ET today.

How many interest rate cuts do you anticipate for 2024, one or two? Hit reply to this email or let me know on X @philrosenn.

*At a glance:

*Data as of Thursday 11 p.m. ET

Elsewhere:

🚀SpaceX hovers at $210 billion valuation. Elon Musk’s rocket company will sell insider shares at $112 each in a tender offer, far outpacing its previous valuation of $180 billion in December. Sources close to the matter say there is huge investor demand to get in on the now-private company. (Bloomberg)

👟Nike stock tumbled in after hours trading. The retailer reported lower-than-expected revenue for the latest quarter, as it saw weaker footwear sales in North America. Company executives have recently acknowledged Nike has lost ground in the running market. (WSJ)

🪙More crypto is coming to Wall Street. VanEck filed for the first-ever Solana ETF in the US. Regulatory approval of Solana could usher in even more demand for digital assets among traditional institutional investors — demand which has already been stoked this year via spot bitcoin ETFs and the potential for spot ether ETFs. (Reuters)

💰️Traders see more volatility — and opportunity — with Trump. Markets usually don’t like uncertainty. But that’s not the case for certain hedge funds that seek out anomalies and big swings. As one trader put it: “Politics aside, if you ask a trader whether he wants placid Biden or stormy Trump, the trader is going big wave surfing — so it’s Trump.” (Bloomberg)

Rapid-fire:

  • Friday marks the Russell Reconstitution, one of the busiest trading days of the year when the Russell benchmark indexes are shuffled (Reuters)

  • Walgreens stock plunged 22% for its worst trading day in four decades (Yahoo Finance)

  • Shares of Chewy and Petco soared after meme-lord Roaring Kitty posted a photo of a dog on X (Bloomberg)

  • Atlanta Fed President Bostic says the economic data do not give him confidence to cut interest rates yet (WSJ)

  • Bed Bath & Beyond board members were concerned Ryan Cohen got insider info before his $60 million windfall (Business Insider)

  • Bulgaria and Romania failed economic tests to start using the euro (FT)

Last thing:

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