For example, on Friday, the Dow Jones Industrial Average jumped by over 800 points. Much of that lift was the result of increasing optimism that the Federal Reserve will make several interest rate cuts before 2019 is over. Rate traders are currently giving almost 90% chances to a quarter-point rate cut on September 17. They expect more than 80% chance for a cut at the next meeting on October 29. Further adding to hopes of a dovish Fed, there’s now a 60% chance of a third cut coming as early as Dec. 10th. All this bullish sentiment has led the Dow to be trading over 3% higher from the closing price of last week. This continued bullishness is driving the index up toward the 44,000 level.
Market conditions are on the upswing at the moment. This shift comes as Canada’s economy is showing weakness on multiple economic fronts along with President Trump’s recently announced intentions to slap tariffs on Canada within a week. The President pointed to new dairy tariffs, configured in line with his administration’s USMCA trade agreement, that are intended to restore imbalanced trade. Providing meaningful transparency on trade matters continues to be an elusive goal for the Trump administration.
Economic Indicators Highlight Mixed Signals
The economic landscape markets are facing today is filled with competing and contradictory signals that traders will need to weigh. With core Personal Consumption Expenditures (PCE) index in May up to 2.7% year-over-year, there are signs of increasing inflationary pressures. This figure follows an upward revision of the last PCE index print, now at 2.6%.
Aside from these inflationary signals, other economic data paints a troubling picture. Measuring personal income, U.S. personal income sharply contracted by -0.4% in May, the steepest contraction since October 2021. Personal consumption mirrored this trend with a small decrease of -0.1%. These declines indicate that consumers are starting to pull back as they react to uncertain economic times.
Inflation expectations are something traders are watching very closely. The University of Michigan’s Consumer 1-year Inflation Expectations have decreased to a still-elevated 5.0%. This decrease could play a role in the Federal Reserve’s thinking as they weigh future cuts to their short-term interest rate.
Federal Reserve’s Rate Cut Expectations
Expectations for the Federal Reserve’s actions are driving market sentiment and influencing the Dow’s performance. Right now, traders expect three cuts by the end of 2025, starting with the shortly expected September cuts. Together, market participants nearly unanimously agree that these reductions are imperative. They view them as an opportunity to spur economic growth and address inflation worries.
Expectations for a 25 basis point cut at the next FOMC meeting have fueled bullish sentiment among investors. The Dow’s staggering run-up is evidence of a euphoria-fueled wave of optimism. There is hope that the Fed’s monetary easing will encourage greater economic activity and consumer spending in the coming months.
“an additional understanding of a framework to implement the Geneva agreement” – White House official
This statement from a White House official underscores ongoing discussions regarding international trade agreements, particularly as the Trump administration navigates complicated trade relationships.
Market Reaction and Future Outlook
The recent up and down movements in the stock market show clearly that investors are reacting strongly to news on federal monetary policy and to announcements about trade. And with the Dow Jones Industrial Average approaching 44,000 investors are sounding bullish once again. Expected interest rate declines are coming. At the same time, continued swings in trade policies have fostered a climate conducive to market disruption.
Analysts assert that just the expectations of future rate cuts provides a positive market momentum all its own. They caution that this optimism poses dangers, especially if positive economic forecasts fall short. In both cases, as traders shift their gaze toward the future, they’ll be tracking both domestic economic data and the evolution of international trade.