The recent Federal Reserve meeting and positive inflation data have sparked hope for a smooth landing in the US economy. The news that US consumer prices remained unchanged in May has caused optimism that the Fed may consider cutting rates later this year. According to Federal Reserve Chairman Jerome Powell, inflation is decreasing without causing significant economic harm, but he emphasized the need for more proof before committing to rate cuts.
The Fed has adjusted its rate cut projections from three cuts of 25 basis points to just one cut, in line with market expectations. However, futures markets are anticipating a more aggressive 45 basis points of easing. Despite this cautious optimism, the S&P 500 Index closed up 0.9% at a record high level, showing an increase of almost 14% in 2024. Meanwhile, the 10-year Treasury yield dropped to its lowest point since April before rebounding.
For markets, there is a sense of optimism on the horizon. Declining inflation and potential rate cuts may lead to lower Treasury yields, making stocks more appealing. Sectors that were previously impacted by higher interest rates, such as small caps and financial firms, could benefit from these developments. The Russell 2000 Index, which has struggled to gain momentum this year with only a 1.5% increase, could see improvement if conditions continue to improve.
In the bigger picture, the Federal Reserve is navigating a delicate balancing act. Waiting too long to implement rate cuts could hinder economic growth while making premature decisions without adequate data is risky. This prudence means that the market needs to be patient but with positive surprises in corporate earnings and a resilient economy, the overall outlook remains positive. Experts like Carol Schleif from BMO Family Office recommend a moderate overweight in US equities, reinforcing the positive sentiment towards the market.
Overall, investors should keep their eyes on future developments related to inflation and rate cuts as they can have significant impacts on markets and sectors alike
