The CME FedWatch tool tells the markets that the odds of the U.S. federal funds rate falling from 5.00% to 5.25% is 93.3%.
The tool indicated a 6.7% probability of a 50 bps cut. In effect, the forecast set a 100% chance of some form of a rate cut. The 3-month Treasury bill yields 5.33% and is at the low end of its 5.25% to 5.69% 1-year range. Bond investors are taking an even bigger bet on a rate cut. The 30-year Treasury yield rose to 4.38%. This lifted the TLT ETF to $94.15, compared to its $82.42 - $102.98 range.
Bond investors may want to wait for this ETF to cross $100 before increasing their allocation to U.S. debt.
Stock markets have the June CPI report to thank. After inflation fell by 0.1% from the prior month, annual inflation fell to a 3-year low at 3.0%. Furthermore, the Federal Reserve suggested that it would not need to wait for inflation to fall to its 2.0% target.
Bank stocks rallied as a result. JP Morgan (JPM), Morgan Stanley (MS), Goldman Sachs (GS), and Bank of America (BAC) traded at new highs. This sector benefits when rates fall. Lower rates stimulate the economy, increasing business for banks.
