Today is quiet with no events scheduled. The main focus for the week is the US CPI report releasing tomorrow. Markets might consolidate before this release or continue the trend following recent dovish Federal Reserve commentary.
Fed Official Indicates Rate Cuts
Over the weekend, a Fed official favoured three rate cuts by year-end, suggesting more labour market weakness could prompt a larger rate cut. The recent commentary hints a rate cut in September might be inevitable, unless inflation data is unexpectedly high and a strong NFP report in September alters this stance.
Currently, the Federal Reserve appears hesitant to dismiss labour market weakness. Tomorrow’s CPI report needs to exceed expectations to affect market pricing. Attention will then shift to further Federal Reserve commentary and the Chairman’s upcoming speech at the Jackson Hole Symposium, which might signal their stance on a potential September rate cut.
With nothing on the calendar, we are in a holding pattern ahead of the US CPI report tomorrow. The market is likely to either drift sideways or continue the trend set by recent dovish comments from the Federal Reserve. This quiet period is an opportunity to position for the week’s main event.
Over the weekend, Fed Governor Bowman supported the idea of three rate cuts by the end of 2025, adding that more labor market weakness could prompt bigger cuts. This confirms the trend we saw in the July jobs report, which showed payrolls growing by only 150,000 and the unemployment rate ticking up to 4.1%. The Fed appears unwilling to risk a sharper downturn in employment.
Market Pricing and September Rate Cut
This dovish sentiment is already heavily priced into the market, with Fed Funds futures showing an 85% probability of a rate cut in September. For this reason, a significant change in direction would require a major data surprise. We have seen this before, particularly when looking back at the Fed’s pivot in late 2023 after a long hiking cycle.
For tomorrow’s CPI, a year-over-year figure above the consensus forecast of 3.2% would be needed to challenge the rate cut narrative. Traders might consider buying short-term options on the VIX or Treasury note futures to hedge against a spike in volatility if inflation comes in hot. A CPI number at or below expectations will likely just reinforce the current path toward a cut.
Regardless of the inflation data, our focus will then shift to commentary from other Fed officials and Chair Powell’s speech at the Jackson Hole Symposium later this month. Any hint of hesitation to cut rates in September could cause a sharp repricing in the bond market. We must listen carefully for any change in tone from what we have been hearing.
