- Traders are awaiting the US CPI report for more clues on Fed rate cuts.
- Economists believe the annual CPI will accelerate from 2.7% to 2.8%.
- Trump has started making changes in the Fed that could also affect future policy moves.
Equities ended lower on Monday as market participants prepared for the crucial US consumer inflation report. Still, there was some optimism after Trump announced an extension of the US-China trade truce for another 90 days.
Equities on Monday stayed mostly on the sidelines, awaiting the US CPI report for more clues on Fed rate cuts. Last week, economic data and Trump’s Fed nomination added to bets of a more dovish Fed in the future.
Notably, data during the week revealed weaker-than-expected business activity in the services sector. At the same time, unemployment claims rose more than expected, fueling worries about the labor market. The US labor sector has slowed more significantly than most had imagined. The most recent jobs report revealed weak job growth, which sent Fed rate cut expectations higher.
US inflation (Source: Bureau of Labor Statistics, Bloomberg survey)
However, traders are also aware of the uptick in inflation. Trump’s tariffs have pushed up consumer prices, and this has kept the Fed on a cautious path. Economists believe the annual CPI will accelerate from 2.7% to 2.8%. Meanwhile, the monthly figure might ease from 0.3% to 0.2%.
“The inflation data is starting to embody the more direct tariff impacts on the consumer, raising concern that inflation will remain sticky,” said Eric Teal, chief investment officer at Comerica Wealth Management.
“Lower inflationary readings and slower growth numbers are needed to support the case for lower rates.”
If inflation is hotter than expected, rate cut bets will fall. However, some believe the Fed will still cut rates in September due to the slowdown in the labor market. Still, the outlook for rate cuts might change. Hot inflation and weak growth would force the Fed to keep balancing. This means maintaining a cautious tone.
However, Trump has already started making changes in the Fed that could also affect the future. The US president recently picked Steven Miran to fill a vacancy in the Fed. Experts believe he will be dovish at the next meetings.
Moreover, Powell’s term is coming to an end. Already, the government is looking at possible candidates for the position. There is a high chance the next Chair will be more political and inclined to cut interest rates.
