Remember back on July 5th after the stronger than expected employment report when the probability of a July 50 basis point (bps) rate cut plunged from 29% all the way down to 5%? Of course, you don’t! It was a summer Friday between July 4th and the weekend. The following Monday, though, market expectations for a 50 bps cut continued to fall, even falling below 3% early that week. Ever since that knee-jerk reaction to the employment report, though, probabilities for a 50 bps cut have been back on the rise and are higher now than they were right before the release of the June employment report. At over 34% now, the market is pricing in better than a 1 in 3 chance of a 50 bps cut at the July 31st meeting.
While there have been some weaker than expected data points since the employment report (Industrial Production, Capacity Utilization, Housing Starts, and Building Permits), there have been many more better than expected reports. Small Business Sentiment, Jobless Claims, Empire Manufacturing, Homebuilder Sentiment, Retail Sales, CPI, and PPI are all reports that have come in better than expected since July 5th. While not all the readings have been particularly strong, it’s puzzling to see probabilities of more aggressive easing rise even as the pace of better than expected reports improves. Start a two-week free trial to one of Bespoke’s premium equity market research services.