Markets Are Likely Overestimating Amount of Rate Cuts

Jeffrey Roach:

Hi, I am Jeffrey Roach, Chief Economist for LPL Financial, with an update on what's happening in the global markets and a call to action for investors. First, markets likely overestimate the amount of rate cuts. Well, you can see in this chart that traders are pricing in a very aggressive rate-cutting campaign. This is probably overdoing it. Just like earlier this year, the markets anticipated aggressive cuts, despite the Fed saying otherwise, and what's interesting is in the middle of the year, the pendulum swung the other way. Markets were expecting no cuts. And for a brief moment, some people were talking about the Fed hiking. Now, obviously something we did not believe here at LPL. Given the improved inflation picture and a softer job market, the Fed will indeed start its rate-cutting campaign and cut at each of the remaining meetings this year. The call-out here is that investors should be cautious about misaligned expectations between the markets and the Fed itself.

Jeffrey Roach:

Second, inflation trends keep improving. As you see in this chart, annual inflation decelerating in August to 2.5% from 2.9% in July, giving the Fed flexibility to focus on the job market. And here are some details on consumer prices. Shelter costs rose 0.5% in August, and that was the main driver of headline inflation this month. Energy prices fell 0.8% over the month, as global weakness suppressed oil demand. Motor vehicle insurance continues to rise as paying customers are covering the costs for non-insured and underinsured motorists. Inflation trends will give the Fed opportunity to pivot toward the employment mandate for the rest of this year. And further, this chart explains why the Fed can cut rates and yet remain restrictive. Third and final, expect the U.S. dollar to hold steady. If the Fed doesn't cut as aggressively as markets are currently expecting and if we have synchronized easing across global central banks, we could see the dollar hold steady, but this all depends on the relative speed of interest rate normalization across countries. In a nutshell, interest rate differentials are still the best factors to use when building out currency scenarios. What does this mean for investors and business owners? Expect a slowdown in hiring in the near term. Expect interest rates to fall through the next 12 months. And finally, we expect markets to be a bit choppy as we move closer to the elections. Well, that's all for now. If you want more insights on global market trends, follow us on social media and take care.