Today is calm, with no events planned. The main event this week is the US Consumer Price Index (CPI) report coming out tomorrow. The markets may either stay steady before this report or continue the trend seen after the recent dovish comments from the Federal Reserve.

Fed Official Supports Rate Cuts

Over the weekend, a Fed official mentioned the possibility of three rate cuts by the end of the year. He indicated that if the labor market shows more weakness, larger cuts could happen. The recent comments suggest that a rate cut in September seems likely unless inflation data surprises with high numbers and a strong non-farm payroll (NFP) report changes the outlook. Currently, the Federal Reserve seems cautious about ignoring labor market weaknesses. The CPI report tomorrow needs to be better than expected to influence market pricing. Afterward, all eyes will be on further comments from the Federal Reserve and the Chairman’s upcoming speech at the Jackson Hole Symposium, which might indicate their position on a possible September rate cut. Since there’s nothing scheduled today, we are in a wait-and-see mode ahead of the US CPI report. The market may either stay on the same path or continue following the recent softer tones from the Federal Reserve. This quiet time gives an opportunity to prepare for the main event of the week. During the weekend, Fed Governor Bowman endorsed the idea of three rate cuts by the end of 2025, stating that more weakness in the labor market could lead to bigger cuts. This reflects what we saw in the July jobs report, where payrolls only grew by 150,000 and the unemployment rate rose to 4.1%. The Fed seems cautious about risking a more substantial drop in employment.

Market Expectations for September Rate Cut

This dovish sentiment is already reflected in the market, with Fed Funds futures indicating an 85% chance of a rate cut in September. Therefore, a significant shift would require surprising data. We have seen similar situations before, especially with the Fed’s pivot in late 2023 after extending their rate hikes. For tomorrow’s CPI, a year-over-year figure above the consensus forecast of 3.2% would be needed to challenge the narrative of a rate cut. Traders might think about buying short-term options on the VIX or Treasury note futures as a hedge against a spike in volatility if inflation exceeds expectations. A CPI reading at or below prognoses will likely strengthen the current expectation of a cut. Regardless of the inflation data, our attention will shift to comments from other Fed officials and Chair Powell’s speech at the Jackson Hole Symposium later this month. Any suggestion of hesitation to cut rates in September could lead to a sharp retracement in the bond market. We must pay close attention to any change in tone from what we have heard so far. Create your live VT Markets account and start trading now.

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