As of 2 p.m. New York time, the Standard & Poor’s 500 is up 2.01% and the Dow Jones Industrial Average is ahead 1.53%. The NASDAQ Composite is higher by 2.71% and the NASDAQ 100 has gained 2.64%. The small-cap Russell 2000 index is higher by 2.77%.
And all this on a conclusion that the drop in the July headline CPI inflation reading to an 8.5% annual rate from June’s 9.1% rate is enough to make the Federal Reserve decide to raise interest rates by 50 basis points at its September 22 meeting instead of the 75 basis points move so strongly favored yesterday.
To understand the size of this shift in sentiment take a look at the odds in the CME FundWatch Tool. Yesterday, the market–this tool uses prices in the Fed Funds Futures market to calculate the odds of a Federal Reserve move–was pricing in a 68% chance of a 75-basis-point increase. This morning, August 10, after the CPI report, the odds of a 75-basis-point increase had dropped to 37.5%.
And the odds of the Federal Reserve deciding on just a 50-basis-point increase had jumped today to 62.5% this morning from 32%.
That’s quite a shift.
And quite frankly I don’t see enough in the data to support this downgrade of the chances of a 75-basis-point interest rate increase on September 22.
After all, the annual core CPI inflation rate stayed steady in July at 5.9% from June. The Fed watches the core rate rather than the headline rate, remember?
I think that over the course of the next few days, the market will rethink its knee-jerk enthusiasm and we’ll see the odds of a 75-basis-point increase in September begin to climb again. I’m already seeing that today. As of 1 p.m. New York time, the odds of a 75-basis point increase have climbed to 41.5% from this morning’s 37.5%. And the odds of just a 50-basis-point move have dipped to 58.5% from the morning’s 62.5%
I’m going to use this burst of enthusiasm to make a sell or two. In my next post.
