Federal Reserve Chair Jerome Powell ended a press conference in which he gave markets exactly what they anticipated he would say. The Fed left rates unchanged, noted that job growth was weaker but still strong and hinted it was slowly winning the war on inflation. Stocks have been positioned for a three-stage process from the Fed: 1) setting the stage for rate cuts at today's meeting, 2) examine data in the next month and perhaps fine-tune the response at the Jackson Hole conference in August, and 3) begin rate cuts in September. The first stage is unfolding as expected. Powell, in his press conference, said "the labor market has come into better balance, and the unemployment rate remains low. Inflation has eased substantially from a peak of 7% to 2.5%." If there was any doubt he was feeling better about inflation, Powell later said, "we have growing confidence that we are on a sustainable path to two percent," the Fed's long-term target for inflation. That's exactly what the markets wanted to hear. Markets are now pricing in a 100% chance of a rate cut in September. What's next? The good news is the two or three months leading up to a rate cut are usually good for the markets. Next up: the July jobs report on Friday, and then Jackson Hole in late August. The risk to the market is we may get a series of aberrant inflation reports that would keep rates high and cause Powell to make cautious comments at Jackson Hole. Maybe, but it seems unlikely. We are not hearing about weird outlying signals. We are not hearing about skyrocketing rents, or airfares or hotel rooms. The inflation data seems to be narrowing. It's also possible we may see sudden economic deterioration, but that too seems unlikely, and at any rate that would drive rates even lower. Despite the fact that August is usually a rocky month, and assuming the data is unsurprising, the most-likely path is more of the same, more of the rotation we have seen for the past several weeks. Remember what happened in July That said, this is a very tricky time for the markets, and if you doubt that, look at what has happened over the past three weeks. The consensus as we entered July was that inflation was still a very real danger and that the Fed may keep rates higher. Investors were flocking to high-price tech stocks and ignoring everything else. On July 11, the June CPI report came out, which showed inflation moderating more than expected. Boom. Turned out the consensus was wrong. Inflation wasn't such a clear and continuing danger, and a lot of investors were caught offside. Megacap tech sold off and investors turned to small caps and value stocks instead. Ten-year yields have gone to 4.12% today from 4.28%. That trend continues today. If the consensus can be wrong about something as big as where the Fed is going, it certainly argues for everyone to be a lot more humble about their opinions going into the notoriously difficult month of August.
