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Consumer price index data this week provided encouraging signs that American inflation is moving ever closer to the Federal Reserve’s much-discussed 2% target . This fueled speculation about interest rate cuts. The annual inflation rate dropped more than expected to 3% in June 2024, reaching its lowest level since March 2021.
Remarkably, the monthly inflation rate showed a contraction of 0.1% for the first time since May 2020. Investors and economists increased their convictions on the Fed's readiness to cut interest rates in September , pushing market-implied odds of a cut to over 90%.
A higher-than-expected producer inflation data report Friday did little to alter these expectations significantly, as the latest consumer sentiment report from the University of Michigan confirmed subdued morale and a decline in inflation expectations. In the markets, sectors previously impacted by high interest rates — and have not yet priced in potential reductions in borrowing costs — outperformed the tech sector, which had already largely anticipated such rate cuts. The equal-weight S&P 500, as tracked by the Invesco S&P 500 Equal Weight ETF RSP outpaced the cap-weighted S&P 500, monitored through the SPDR S&P 500 ETF Trust SPY , while value stocks outperformed their growth counterparts.
Both the real estate sector — as tracked by the Real Estate Select Sector SPDR Fund XLRE – and the Russell 2000 small-cap index — as replicated by the iShares Russell 2000.
