On Wednesday, the BLS will publish the U.S. CPI for the month of August, with the consensus pointing to a 2.6% increase. After chairman Powell speech in Jackson Hole and subsequents comments from voting members of the FOMC, the Fed should cut rates the following week. The odds for rate cuts are currently pointing to a 70% chance of 25 bps cut and 30% chance of 50 bps cut. Absent any surprises on the inflation front or in the markets, it’s difficult to see the Fed starting the cycle with a 50 bps cut, even though the discussion is on the table. The market has started a sector rotation discounting not only this cut, but the ones that should follow, and the recent retracement, has probably more to do with that adjustment than anything else. The 2 year Treeasury yield is already at 3.65%, betting heavily on the cutting cycle, almost 200 bps below current Fed funds, and the slope of the curve (2 vs 10) is 6 pbs, small but positive. The market is positioning for the new cycle.
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