Here’s what happened this week, when financial markets experienced a seismic shift. Yields on government bonds shot up, causing analysts to recalibrate their expectations for the path of interest rates and economic growth. That’s because the ten-year Treasury yield jumped from 4.20% to 4.29%, and two-year yields shot up to 3.74%. Yields had a particularly noticeable jump with the release of July’s Producer Price Index (PPI). First, the PPI increased by 0.9%, blowing away forecasted expectations of a 0.2% increase.
The unexpected PPI data provided hawkish analysts with justification to keep the possibility of a September rate cut alive, despite the cautious sentiment permeating the market. After Powell’s July FOMC communications came under fire for policy signals stemming from tariffs, instead committing to await more data. For that reason, the Federal Reserve appears to be moving in the direction of easing its monetary stance.
A total of almost 400 names under the S&P 500 were down, indicating a larger and more widespread market pullback. Interestingly enough, Tesla shares were down 2%, and Apple was down on a fractional basis. Uncertainty is rearing its head among investors. They are still wrestling with the effects of rising US yields and bad economic news out of the Eurozone. The Eurozone’s industrial production data was particularly weak, further contributing to concerns about global economic health and halting the EUR/USD’s advance toward the 1.1800 mark.
The market is now pricing in a dovish 25 bp cut in September. Most analysts think there will likely be only two reductions, and those in 2025. Some believe that in a best-case scenario, three cuts may be likely, based on how the economy develops.
Of course, those experts have not yet given up hope on that magical 50-basis-point-cut come September. This long-held expectation is now under question due to stronger than anticipated economic data.
“Don’t get used to it.” – Source not explicitly mentioned
That melt-up in equity markets just hit a big bump in the road. This leads to questions as to whether or not these recent improvements are sustainable. Now, investors are looking to every economic release and all Federal Reserve communications for hints and cues on the path forward with monetary policy.