Another test

Just when it appears the dust has settled regarding the Fed and rates, we have another moment of tension that can derail plans for a rate cut. Tomorrow, the U.S. will publish the PPI for the month of August, and on Thursday, the CPI. With the recent announcement that OPEC+ will increase oil production, we don’t need to worry too much about energy inflation, but we still have the impact from tariffs. Big investment banks are piling in regarding rate cuts, and as you can see below, they expect cuts every quarter for the next 12 months, to put rates in the 2-handle by the end of 2026. The inflation numbers will be the last data points directly related to the Fed dual mandate, before the FOMC meeting next week, and the market is 100% sure there will be a cut in the meeting, according to Fed Funds futures. The bond market seems to like this idea, with the 2 year comfortably waiting at 3.5%, almost a point below current official rates, and the 10 year slipping away from the 5% hurdle. The dollar is the one taking a hit, with the dollar index testing 97. Gold keeps telling us things are not ok, but investors seem to be fixated with the concept of easy money and the impact on equity indices.

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Chart source: Morgan Stanley