The likelihood of U.S. interest rate cuts has surged following the release of a tamer-than-expected inflation report, which had kept financial markets on edge. Wednesday’s Consumer Price Index (CPI) data revealed a moderate increase in prices for July, with annual inflation dropping below 3% for the first time in nearly three and a half years.
In the wake of the CPI report, investor discussions have shifted from whether the Federal Reserve will cut rates at its September 17-18 meeting, to how substantial the cut might be. Market participants are leaning toward a modest 25 basis point reduction, though there remains a significant 40% chance of a larger 50 basis point cut, according to CME FedWatch. The upcoming Jackson Hole symposium, scheduled for August 22-24, will offer Fed Chair Jerome Powell an opportunity to clarify the Fed’s stance ahead of the crucial meeting.
The coming weeks will bring a slew of additional U.S. economic data, starting with Thursday’s release of monthly retail sales figures and the weekly jobless claims report. These reports are expected to be closely analyzed, particularly in light of the weak employment data from early August, which raised concerns about a possible recession.
Despite the earlier volatility sparked by the weak jobs report, market sentiment appeared to stabilize following the CPI release. The S&P 500 index gained 0.4% on Wednesday, with the index now just under 4% below its record high set in July. The Cboe Volatility Index (VIX), a key measure of market volatility, also eased, closing slightly above 16 on Wednesday, down from a peak of over 65 earlier in the month.
In a sign of renewed investor confidence, candy giant Mars announced its intention to acquire Cheez-It maker Kellanova for nearly $36 billion, marking the largest corporate deal of the year so far.
The focus on rate cuts extended beyond the U.S. as well. New Zealand’s central bank reduced its benchmark rate for the first time since March 2020 and signaled more cuts in the near future.
Meanwhile, Japan is set to release its GDP data for the second quarter on Thursday, with investors still digesting the news that Prime Minister Fumio Kishida plans to step down in September. Additionally, China is expected to release a series of economic indicators, including retail sales, amid growing concerns about its economic performance in July.
Key Developments to Watch on Thursday:
- China industrial output and retail sales data for July
- Japan’s second-quarter GDP report
- U.S. retail sales for July
