Question for Rates is Not Where but Why

It seems pretty clear that the pieces are in place for the Fed to begin cutting rates this year, likely in September. Inflation data are consistently cooperating, and the trend looks fairly reliable. We haven't quite heard the heavy dovish language from Powell yet, but odds are he'll begin leaning more clearly toward cuts at Jackson hole. 

The challenge for investors, then, there's not so much figuring out the direction for interest rates, but rather why they are moving that way. Is it because of a clean victory against inflation? Or is it because The economy has been strained enough to crush output?

On the one hand inflation of course has slowed a huge amount from the post-Covid highs while nominal levels of activity and growth in the economy are solid. Then again, unemployment has risen and is clearly trending higher, and consumers have noticeably withdrawn from spending on big-ticket items. 

CPI again This morning looks to be taming, but keep in mind the Last light CPI number was the day the Nasdaq peaked, causing the first domino to fall that would eventually lead to our big sell-off last week. As bond yields and stocks dove together over the past month, the message from the market was clear: rates need to come down for the wrong reasons. 

That's why jobless claims and retail sales tomorrow are the more important data points this week. Inflation data seem to support the trend towards lower rates, but if jobs data are deteriorating and retail sales are weak, stocks will not likely be able to celebrate.

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