The crucial inflation report this morning will have the most influence on stocks today and the month ahead. It guides the Federal Reserve’s interest rate-cutting policy.
Markets rode an overly optimistic scenario that assumed six interest rate cuts. Despite no rate cut in March and an improbable one in June, the S&P 500 (SPY), Dow Jones, and Nasdaq (QQQ) did not fall by much. The core PCE inflation reading will define the Fed’s pace of rate cuts.
Stock markets will read the PCE data closely while ordinary people outside of investing will not care too much. They are already experiencing significant inflation in food, auto and home insurance, and shelter.
The Fed will not likely justify a rate cut if inflation falls close to 2%. It would weaken its ability to fight a recession. Chances are good that the Fed will keep interest rates above 5.0%. This will give its monetary policy more time to slow cost pressures, especially shelter.
Stock markets are simply not prepared for the Fed holding rates for some time to come. Investors should continue selling REITs since interest on cash-equivalent holdings is above 5%. So, expect continued weakness in REITs like W.P. Carey (WPC), Crown Castle (CCI), Reality Income (O), and American Tower (AMT).
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