Imagine the Federal Reserve as a pilot navigating the economy, while investors are like the eager passengers who clap when the plane touches down smoothly.

Source: Tradingview

On Friday, the SP 500 marked its seventh consecutive day of gains, coming within 2%^[1] of its all-time high reached last month.

Last week’s macroeconomic data indicated that the Federal Reserve has avoided a major economic downturn while keeping inflation in check.

Retail sales figures released on Thursday significantly exceeded economists’ expectations, and weekly jobless claims also declined.

These developments provided evidence that concerns about a rapid economic slowdown, which triggered a global sell-off earlier this month following the July jobs report, were likely exaggerated.

Add to that the slightly lower-than-expected core Consumer Price Index reported last Wednesday, and it is clear why investors are optimistic that the Federal Reserve can implement rate cuts from a position of economic strength rather than reacting late to economic weakness.

On Friday, consumer sentiment also exceeded expectations, according to the latest University of Michigan survey, adding to the positive news for the markets.

This encouraging economic data is driving the rally, boosting investor confidence that a recession can likely be avoided and that the Fed may start cutting rates in September.

Markets focus this week

Global central bank leaders are set to speak at the symposium in Jackson Hole, Wyoming, this week, with a key focus on Fed Chair Jerome Powell’s speech on Friday, which could shape expectations for the path of U.S. rate cuts.

Powell’s remarks will be under intense scrutiny, as market movements this year have largely hinged on the anticipation and scale of potential Fed rate cuts.

Financial markets are betting on a 74.5% likelihood that the Fed will cut its key policy rate by 25 basis points as it ends its September policy meeting, with a diminishing 25.5%^[2] chance of a super-sized 50-basis-point cut

With each new economic report, the market narrative can shift rapidly. Just a few weeks ago, some economists were calling for the Fed to hold an emergency meeting to slash rates. Now, most investors anticipate a modest rate cut of 25 basis points in September, rather than the 50-point cut that was previously suggested.

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Footnotes:

Tradingview
CME’s FedWatch

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