Interest rate futures are now pricing in 8 Fed rate cuts over the next 12 months, the most since the 2008 Financial Crisis.
Market expectations have sharply shifted over the last week toward more cuts in anticipation of economic weakness. Over the last 60 years, every time the market expected 200 basis points of rate cuts, a recession in the US followed within several months. Source: The Kobeissi Letter, Goldman Sachs
July US CPI fell to 2.9%, below expectations of 3.0%
ore CPI inflation fell to 3.2%, in-line with expectations of 3.2%. This marks the first month with CPI inflation below 3.0% since March 2021. However, Supercore inflation snapped back to just above the pre-COVID average after two months of outright declines. Shelter inflation also surged back to a 0.38% m/m gain after an unusual decline to 0.17% in June. This is not the perfect report the hashtag#Fed would be looking for. However, there is nothing overly concerning from what we've seen thus far. The first rate cut since 2020 is probably coming next month.
105bps of fed rate cuts are now priced into 2024.
Source: Mike Z.
BREAKING: The Fed’s Reverse Repo (RRP) facility has dropped below $300 billion for the first time since 2021
The RRP is one of the financial system's excess liquidity metrics and is widely watched by investors. Large banks, government-sponsored enterprises, and money-market funds put their extra cash into the facility to earn interest on it. RRP usage has plummeted by $2.3 TRILLION since December 2022. Over the last several months, however, the decline has stabilized and the facility usage has been oscillating around $300-$400 billion. Source: www.zerohedge.com, Bloomberg
Equities tend to perform well after the Fed cutting cycle starts, unless growth is weak
Source: Goldman Sachs, Mike Z.
Use of Fed's Reverse Repo Facility Falls to Lowest Since 2021
Analysts said investors may have pulled their money from the reverse repo market and placed cash in the overnight repo market, where banks and financial firms such as hedge funds borrow short-term cash using Treasuries or other debt securities as collateral. In addition, a large rise in the supply of Treasury bills on Tuesday and Thursday, is likely to further drain cash from the RRP facility, analysts said. Source: Win Smart, Bloomberg, Yahoo finance
The market is pricing in a 50 basis point rate cut next month.
Market returns following rate cuts have been positive except for periods when the market is generally in crisis. Source: Charlie Bilello, Peter Mallouk
The main reason the economy has been able to avoid a recession over the last 2-years
was due to the massive spending from the inflation reduction and CHIPs Acts. However, the rate of that spending is declining which could potentially weigh on economic growth going forward. Source: BofA, The Daily Shot, Lance Roberts
