On Thursday, the June inflation report increased the odds of the Federal Reserve lowering interest rates by 25 bps. The symbolic cut is good news for stock markets. For several quarters, markets adjusted from expecting six rate cuts down to one or two cuts in 2024.
Traders priced in an 83% probability that rates will ease at the September 17-18, 2024. Stock markets will have a better idea of the Fed’s plans when it meets later this month on July 30-31.
Inflation rose by 3.3% Y/Y on a core basis. That includes food and energy prices. Bond markets reacted quickly. The popular trade is the 20+ Year Treasury bond ETF (TLT). After bottoming in the low $80s, TLT stock could rally to $95 toward $100. It needs a weakening job report and inflation falling steadily from here.
Persistently high shelter prices, however, would hurt D.R. Horton (DHI) and Lennar (LEN). Demand for homes will remain weak if mortgage rates do not fall by more.
Food stocks still face selling pressure. Pepsi (PEP) posted revenue of $22.5 billion, up by 0.8% Y/Y in the second quarter. It faces less pricing power as consumers cut back on spending.
Investors should watch PEP stock at current levels. It will perform the sector if the economy faces a consumer recession next.
