Most analysts expect there will be no change to the federal funds rate at the meeting this week, keeping the target range at 5.25 to 5.50%. It is to be expected the FOMC will hint at a possible 25 basis point September rate cut. Wall Street and Main Street consensus holds they are moving closer to a rate cut, and the Fed’s communications this week should reflect that. Considering the Fed’s preferred inflation gauge (PCE) now hovers at 2.6%, the FOMC is likely to acknowledge it is more confident about its handle on inflation and in turn its inclination to lower rates. In June, the U.S. Consumer Price Index was up 3% from a year earlier its best reading since March 2021. However, that’s still above the Fed’s 2% target, and there are good reasons to be cautious considering the cost of shelter is still trending above 5% per annum. Based on current CME Group data of Fed funds futures markets, participants are also pricing in a 2nd rate cut at the November meeting, and a 3rd rate cut in December.

Since the June CPI inflation readings came below estimates on July 11th, tactical investors have been rotating out of mega cap tech and into interest rate sensitive small caps, financials, biotech, and home builders. There is also an underlying value tilt rotation and momentum build up the equal-weighted S&P 500 index. The remainder of the week is full of big tech earning reports from big names like Apple (AAPL), Microsoft (MSFT), AMD (AMD), and Amazon (AMZN). Considering the Nasdaq-100 is coming off a three-week correction, it is possible solid earnings and guidance from several big names along with a dovish Fed lends to the mega cap rally along with new 52-week highs for the Russell 2000 by the end of the week.

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