Are Rate Cuts Expectations & Trump Shifting the US Markets?

In a speech he gave yesterday (Monday, 15 July) at the Economic Club of Washington D.C., Federal Reserve Chair Jerome Powell hinted that members of the Federal Open Market Committee (FOMC) might not wait for inflation in the United States to reach the Fed's objective of 2% before lowering interest rates. 

Some traders likely became more optimistic about an upcoming rate reduction as a result of his statements, probably pushing Wall Street higher and the US Dollar (USD) lower. Additionally, increased bets on Donald Trump's victory in November's presidential election might also have supported Wall Street.

Let’s take a closer look:

Is a September Rate Cut on the Horizon?

Jerome Powell commented yesterday, Monday, 15 July, that the FOMC might not wait until inflation reaches the 2% target before starting to reduce interest rates. He noted that the "long and variable lags" in U.S. monetary policy could push inflation below 2% if the Fed waits too long to adopt a more hawkish stance.

The Fed’s chair highlighted that inflation is moving in the right direction, with three readings from the second quarter, strengthening confidence that price increases are returning to the Fed’s target. 

In June 2024, the core Consumer Price Index (CPI) rose by 3.3% year over year, following a 3.4% increase in May and a 3.6% rise in April. The Personal Consumption Expenditures Index (PCE), the Fed's preferred inflation indicator, will be published on Wednesday, 26 July. In May, the PCE rose 2.6% after a 2.7% increase in both April and March.

Despite Powell's optimism about inflation, there are still concerns regarding U.S. economic growth. Indicators suggest that Gross Domestic Product (GDP) and employment are slowing, as detailed in our previous market analysis "Are the US and NZ Weighing Prolonged High Rates?". Nonetheless, Powell believes a "hard landing" for the economy is highly unlikely.

Powell's comments, expected to be his last before the next Federal Reserve meeting on Tuesday, 30 July and Wednesday, 31 July, may have influenced rate cut expectations among traders. According to the CME FedWatch tool, market participants now anticipate 68 basis points of easing in 2024, with a rate cut in September fully priced in.

Traders will continue to monitor new economic data and market insights and the upcoming Fed meeting at the end of July for further clues about the FOMC's next moves.

The Dow Jones Index Hits a Record High

Wall Street finished the day in the green yesterday, on Monday, 15 July, with the Dow Jones Industrial Average (USA30) closing at an all-time high of 40,211.72.

The optimism about the possibility of a reduction in interest rates in September likely supported the index. Additionally, traders may have also considered the likelihood that the failed attempt to assassinate former President Donald Trump at the Republican National Convention (RNC) would improve the prospects of both Trump and the Republican Party in the election that will take place in November. 

A Republican Party win could potentially result in tax and economic policies that are favourable to traders. In light of the recent events, shares in Trump Media & Technology Group (DAWC) increased by more than 30% yesterday.

The USD Remains Near Five-Week Lows on Tuesday, 16 July 

Compared to other major currencies, the US dollar's value has probably been weakening because traders seem now more optimistic about the Federal Reserve reducing interest rates soon. 

Today (Tuesday, 16 July), the US Dollar index (DX) hit a one-month low. 

As the Fed sets the federal funds rate, it influences interest rates across the US economy. Therefore, lower interest rates in the US tend to make holding US dollars less attractive to foreign traders, which can lead to lower demand for US dollars, weakening its value. (Source: Investopedia)

Conclusion

The US market appears to have been influenced by both rate-cut expectations and political developments early this week. 

Recent remarks made by Federal Reserve Chair Jerome Powell have increased trading expectations for a possible rate cut in September, pushing the Dow Jones to all-time highs and depreciating the USD. Furthermore, the market's confidence in a Republican win in the next election may have increased as a result of the unsuccessful attempt to assassinate former President Trump.

Most traders are likely keeping an eye out for more economic data and policy cues as the Federal Reserve's 30-31 July meeting draws near in order to predict the FOMC's next course of action.