After the CPI, PPI and unemployment numbers in the U.S., the market is realizing that the path to rate cuts has changed. At the beggining of the year, the most probable scenario was 25 bps cuts on every meeting before the election on November, for a total of 6. Now, we might not have any cuts before the election (see chart below) since June probabilities are too close to 50%, and cuts on the second half of the year can be interpreted as support for Joe Biden in his reelection, despite the independent nature of the Fed. That opens another path, which is a delay in rate cuts, with a more aggressive take from the Fed post November, if unemployment rises and inflation goes down. But it also opens a third path, not discounted today, which is the one where inflation not only doesn’t go down but rises just enough for the Fed to consider a rate hike. It would look like stocks and bonds are still trading as if the first scenario is the one to be played out.
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Source: Bianco Research
