‘Why not 50?’ Inflation data has traders hoping for bigger Fed rate cut
Wall Street once again sees the possibility of a super-sized rate cut by the Federal Reserve next week. The producer price index unexpectedly fell 0.1% in August . Economists polled by Dow Jones expected a gain of 0.3%. Following the report, the chance of a 50 basis-point rate cut increased to 10.2% from 7% the day before, according to the CME Group’s FedWatch tool, which uses interest rate futures trading to create its odds. “This number now, if the Fed is truly data dependent, the question should be, ‘Why not 50?'” said Mohamed El-Erian, chief economic advisor at Allianz, on CNBC’s ” Squawk Box .” “The employment side is much weaker than they expected … and now the latest inflation print is much better.” Stock futures got a bump after the release, with contracts tied to the S & P 500 rising about 0.5%. To be sure, that move may seem small given the increased chance of a larger Fed rate cut. That’s because Wednesday’s market move is still driven primarily by Oracle — which issued blockbuster guidance that sent shares soaring more than 30%. ORCL 5D mountain ORCL 5-day chart On top of that, traders may not want to get ahead of themselves with the August consumer price index report due for release Thursday. “Overall, it was a softer round of inflation data but not sufficient by itself to start the conversation about a 50 bp Fed cut — for that, investors need to see a soft CPI tomorrow,” wrote Ian Lyngen, head of U.S. rates strategy at BMO. One thing is certain: The Fed will lower rates at its policy meeting next week. “Although tomorrow’s 12-month CPI is projected to come in at 2.9%, vs 2.7% for the prior month, we believe that the FOMC will prioritize recent labor market weakness and start a new rate-cutting cycle next Wednesday,” said Larry Tentarelli, chief technical strategist for Blue Chip Daily Trend Report. “What this means for investors: The S & P 500 remains in a bullish uptrend … Our best ‘rate cut’ ideas remain in homebuilders, small caps, banks and brokers and consumer finance.”
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