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Certainty and its implications

Investors are already discounting, with certainty, that there will be at least a 25 bps rate cut in September. You can see that in the chart below. In terms of headline inflation, excluding food and energy, the trend is already helping the case, with shelter, the biggest component, expected to continue the down trend, perhaps too slowly and with certain disconnection from reality. In terms of unemployment, we have crossed upwards the 4% barrier, which still reflects a fully functioning and fully employed economy, but it shows a trend that indicates weakness or slowdown ahead. And the speed of that deterioration is the key for the Fed. Their main concern is still cutting too soon and spark a second inflation wave, which will destroy the work done so far. Being too slow can create a deep recession. And the difference may rest in starting in September or December. Asset repricing can be aggressive in both directions depending on that decision.


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