Chhad Aul, Chief Investment Officer and Head of Multi-Asset Solutions, SLGI Asset Management Inc.
- The U.S. Federal Reserve (the Fed) announced its key rate is unchanged at 5.25% and 5.50%, which remains at a 23-year high.
- The U.S. consumer price index (CPI) inflation fell below expectations in both May and June. June’s annual headline CPI rose 3% and core CPI was up 3.3%, the lowest since April 2021. Further, annual personal consumption expenditure (PCE) inflation in June came in line with expectations of 2.5%.
- This allowed the Fed to view the inflation spike in the first quarter of this year as a blip rather than a trend. While this could set the path for inflation to normalize towards the Fed’s 2% target, there remains the risk that base effects could stoke CPI in the second half of 2024.
- We think the risk that inflation progress could stall in the second half of 2024 prompted the Fed to be patient and hold interest rates.
- Fed Chair, Jerome Powell, had clearly messaged that after two years of a laser-focus on inflation, the Fed is now looking at both aspects of its dual mandate: maximum employment and stable prices.
- Tightness in the labour market has eased, primarily due to an increase in labour supply rather than job losses. We expect the Fed to reiterate its view that the labour market is balanced rather than in excess supply, which is needed to relieve wage pressure.?
- While the S&P 500 Index continues to be resilient, a few large-cap stocks have dominated the gains. This narrow leadership, along with consumer stress and anemic housing starts, concern us. We think there is room for two 25 bps cuts in 2024 as the labour market softens and inflation normalizes in an environment of restrictive real rates. More cuts beyond this would require a sharp deterioration in the labour market.
- The bond market is signaling that the Fed is nearly certain to cut rates in September. In our opinion, it is a question of whether Powell chooses to push back a little to provide the Fed with flexibility. He may choose to wait for a few more data points until the Jackson Hole Economic Symposium in August to give clues about the Fed’s next move.
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