In recent times, the prevailing debate in the financial world centers around the potential slowdown of the economy in the coming six months.
For much of the year, the primary driver in the market has been the belief that the Federal Reserve has successfully tamed inflation, rendering additional interest rate hikes unnecessary.
As of early Wednesday morning, the Fed Fund Futures market implied only a 7% likelihood of a rate hike on September 20, with odds rising to 38% for a hike on November 1. Current indicators suggest that the Fed may even contemplate rate cuts again by June 2024.
The spotlight now turns to the impending Consumer Price Index (CPI) report, scheduled for release at 8:30 a.m. ET on Wednesday. This report is expected to influence the aforementioned odds.
Projections suggest that the headline CPI could rise by 0.6%, primarily driven by an uptick in energy prices, while Core CPI is anticipated to remain stable at 0.2%.
Economists are growing increasingly confident that the U.S. economy may escape a significant slowdown. The notion of a ‘soft landing’ or potentially avoiding any landing at all is gaining traction.
Previously, concerns loomed over the delayed impact of a dozen interest rate hikes, but these fears have waned as a robust job market persists, and advancements in artificial intelligence kindle optimism for the sustainability of technology sector earnings.
In stark contrast, Europe’s economic landscape presents a different picture. The European Central Bank is poised to raise interest rates once more next week, coinciding with a noticeable economic deceleration in Germany.
This situation mirrors a classic stagflation scenario, yet the prevailing belief is that the United States can steer clear of a similar fate.
While the CPI report is bound to fuel speculation about the Fed’s stance on interest rates, the more significant question emerging is the degree of economic deceleration that may transpire in the next half-year.
A profound debate is unfolding, with economic optimists exhibiting confidence in the face of any slowdown, while economic pessimists grow increasingly vocal about the impending peril.
With the correctness of these contrasting viewpoints uncertain, market participants must rely on market dynamics for guidance.
Recent market activity has been somewhat erratic, with a mixed rebound following a challenging August, and key stocks like Apple (AAPL) and Nvidia (NVDA) experiencing a loss of momentum.
As previously noted, there is a dearth of speculative activity in secondary stocks, and many market participants appear disengaged and preoccupied.
What the market currently craves is a catalyst to inject vitality, and the impending CPI report may well serve as the catalyst to invigorate market sentiments this morning.
(Source: The Street)
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