Markets soar as traders see a Fed rate cut by September at 100%

Dow surged 608, advancers over decliners 4-1 & NAZ crawled up 6.  The MLP index was up 1+ to the 296s & the REIT index went up 2 to the 398s, helped by talk of lower interest rates.  Junk bond funds continued to be in demand & Treasuries were purchased, reducing yields a little.  Oil slid back almost 1 to 82 & gold soared 30 to 2459 for a new record.

Dow Jones Industrials 

US retail sales were unchanged in Jun & the underlying trend was strong, which could boost economic growth estimates for the 2nd qtr.  The flat reading in retail sales last month followed an upwardly revised 0.3% gain in May, the Commerce Dept's Census Bureau said.  The forecast for retail sales, which are mostly goods & are not adjusted for inflation, falling 0.3% after a previously reported 0.1% gain in May.  Still, the outlook for sales is unfavorable.  Households are becoming more price sensitive & focusing on basic needs, evident in earnings reports from major retailers & manufacturers.  PepsiCo (PEP) CEO Ramon Laguarta said last week lower-income consumers were "stretched" & "strategizing a lot to make their budgets get to the end of the month."  Most households have run down the excess savings accumulated during the COVID-19 pandemic & are carrying a lot of credit card debt, which is becoming more expensive as interest rates remain elevated.  Wage growth is also moderating as the labor market cools.  Nonetheless, the pace of consumer spending remains sufficient to keep the economic expansion on track.  Retail sales excluding automobiles, gasoline, building materials & food services surged 0.9% last month after rising 0.4% in May.  These core retail sales correspond most closely with the consumer spending component of gross domestic product.  Growth estimates for the Apr-Jun qtr were around a 2% rate before the retail sales data. The economy grew at a 1.4% rate in the first qtr.

US retail sales unchanged in June, beating forecasts for slight drop

Traders are now 100% certain the Federal Reserve will cut interest rates by Sep.  There are now 93.3% odds that the Fed's target range for the federal funds rate, its key rate, will be lowered by a qtr percentage point to 5.00-5.25% in Sep from the current 5.25-5.50%, according to the CME FedWatch tool.  And there are 6.7% odds that the rate will be a ½ percentage point lower in Sep, accounting for some traders believing the Fed will cut at its meeting at the end of Jul & again in Sep, says the tool.  Taken together, you get the 100% odds.  The catalyst for the change in odds was the consumer price index update for Jun last week, which showed a 0.1% decrease from the prior month.  That put the annual inflation rate at 3%, the lowest in 3 years.  Odds that rates would be cut in Sep were about 70% a month ago.  The CME FedWatch Tool computes the probabilities based on trading in fed funds futures contracts at the exchange, where traders are placing their bets on the level of the effective fed funds rate in 30-day increments.   Simply put, this is a reflection of where traders are putting their money.  Actual real life probability of rates remaining where they are today in Sep are not zero %, but what this means is that no traders out there are willing to put actual money on the line to bet on that.  Fed Chair Jerome Powell's recent hints have also cemented traders' belief that the central bank will act by Sep.  Yesterday, Powell said the Fed wouldn't wait for inflation to get all the way to its 2% target rate before it began cutting, because of the lag effects of tightening.  The Fed is looking for “greater confidence” that inflation will return to 2% level, he said.  “What increases that confidence in that is more good inflation data, and lately here we have been getting some of that,” added Powell.  The Fed next decides on interest rates on Jul 31 & again on Sep 18.  It doesn't meet on rates in Aug.

Traders see the odds of a Fed rate cut by September at 100%

Bank of America's (BAC) 2nd-qtr profit fell as income from interest on loans shrank & provisions for potential credit losses jumped, but a better-than-expected forecast for net interest income sent the bank's shares higher.  Banks are shelling out more on deposits as interest rates are at their highest since 2007, which have boosted returns on bonds, making alternatives such as money market funds more attractive.  The cost of preventing a deposit outflow has eroded banks' gains from the rising interest they are charging borrowers.  Net interest income (NII), the difference between what banks earn on loans and pay out on deposits, fell 3% to $13.7B in the 2nd qtr.  Provisions for credit losses rose to $1.5B from $1.1B a year earlier.  "The strength and earnings power of our leading consumer banking business is complemented by the growth and profitability of our global markets, global banking, and wealth management businesses," CEO Brian Moynihan said.  The 2nd biggest US lender's EPS was 83¢ in the qtr ended Jun 30, compared with 88¢ a year earlier.  The bank expects $14.5B in 4th-qtr NII, above estimates of $14.4B, partly due to headwinds from the repricing of mortgage & auto loans.  BAC's underwriting income jumped 32% in the 2nd qtr of 2024, while fees from syndication surged 77%.  The stock rose 1.92.

Bank of America profit drops on lower interest income, outlook lifts shares

Money is rotating out of tech stocks into the overall stock market.  However it is heavily overbought, an issue that is affecting tech stocks presently.  And nervous investors keep buying gold & Treasuries.