Rate cut arrow on the string! Market bets on 100% probability of Fed rate cut in September

Investors believe that the Federal Reserve will lower interest rates before the end of the September meeting.

According to the data from the Chicago Mercantile Exchange's Federal Reserve Watch Tool, as noted by the Zhitong Finance APP, as of Tuesday morning, the market expects a 100% probability of a rate cut in September, up from 70% a month ago.

Before confidence strengthened, June's inflation data exceeded expectations, while there were signs of further cooling in the labor market. In summary, economists and investors believe that these data indicate that once the inflation rate approaches the Fed's target level of 2%, the Fed will soon begin cutting rates.

Matthew Luzzetti, Chief U.S. Economist at Deutsche Bank, wrote in a research report on July 12th: "Recent data show continued weakness in the labor market and a significant cooling of inflation pressures, especially in all major housing categories."

The research report includes predictions for a rate cut in September. "These developments are likely to have a significant impact on the outlook for monetary policy."

Federal Reserve Chairman Powell stated on Monday that recent data "to some extent" have increased the Fed's confidence that inflation is falling towards the target level. However, the Fed Chairman refused to specify what this means for the Fed's rate cut timetable.

Powell said in an interview with the Washington Economic Club, "I'm not going to signal anything at any particular meeting," "We will meet time and time again and make these decisions based on evolving data and risk balances."

Given a recent series of improving inflation data and signs of a slowdown in the labor market, some on Wall Street have been calling for the Fed to start cutting rates before the impact of rate cuts on the U.S. economy leads to turmoil in the labor market.

Jan Hatzius, Chief Economist at Goldman Sachs, believes in a new research report on Monday that there are "good reasons" for the Fed to start cutting rates at the next meeting on July 31st.

Hatzius wrote: "First, if the reasons for cutting rates are clear, why wait another seven weeks?" "Second, monthly inflation fluctuations are large, and there is always a risk of temporary re-acceleration, which could make a rate cut in September difficult to explain. This risk can be avoided starting in July."

Hatzius also pointed out that although the Fed has pledged to remain independent of the upcoming elections, a rate cut in July would avoid further speculation about the political motives behind its policy decisions. As of Tuesday morning, according to the Fed Watch Tool data, investors only see a 7% probability of a rate cut in July Regardless of whether there is a possibility in July, investors now believe that the future path of interest rates will be lower. Confidence in the upcoming rate cut has driven a broader rebound in the stock market.

As investors shift towards industries outside of technology, the most popular market sectors of the past year have underperformed.

The Roundhill Magnificent Seven ETF, which tracks large tech stocks leading the stock market rise in 2023, has fallen by over 3% in the past 5 trading days. Meanwhile, real estate and industrial sectors, both sensitive to interest rates, have been the market's biggest winners during the same period, with gains of around 5%.

The small-cap Russell 2000 index has risen by over 10%, ultimately breaking through the high point of 2022 for the first time in this bull market.

Callie Cox, Chief Market Strategist at Ritholtz Wealth Management, stated on Monday: "If this trend continues, if the possibility of a rate cut in the fall still exists this year, then we may ultimately see the bull market awaken, which is good news for all investors."