The market is increasingly comfortable that the Fed has hit the terminal top and will cut rates by 100 basis points in 2024.
US 10-year yields are down 10 bps to 4.22% today and Fed funds futures are implying a lower path from Powell ahead of Jackson Hole. The impled probabillity of a hike in Sept is just 11%, though that rises to 30% in November. From there, pricing is increasingly dovish and it's not surprise given that today's US services PMI from S&P Global disappointed, along with soft readings in Europe.
In addition. US retailer Foot Locker today warned on the consumer saying that July comps were down in the low double-digit range while August comps are trending lower in the 'high single digits'. Executives said the weight of the macro environment on lower income consumers became much more evident through Q2 and that back-to-school has started softer as well. That follows on some soft commentary from Target and Dick's Sporting Goods.
In short, this is what the Fed wanted to see, though you could start to argue that it's hitting harder and faster than they hoped. So the question will then turn to how quickly the Fed will raise rates. Many think Powell will argue for keeping rates higher for longer at Jackson Hole and the market might not like that. At the same time, the market might not believe Powell and will stay firm in the belief that the Fed will cut as the unemployment rate rises.
In any case, right now the market is acting as if help is on the way -- or at least is if no further harm is coming. The US dollar has reversed sharply lower and the S&P 500 is up 0.9%. Even oil is staging a comeback, which isn't exactly what you would expect to see on a slowing economy.
