Traders have consulted crystal balls and are eagerly anticipating rate cuts. As of yesterday, the CME FedWatch tool showed nearly a 100% probability of a Federal Reserve rate reduction by September, up from 70% last month. This expectation has driven gold to a record $2,465 per troy ounce and pushed the DOW to a new high, gaining ~4% over the past week.
- This shift follows a 0.1% drop in the June Consumer Price Index from the previous month — bringing annual inflation to its lowest in three years.
- On Monday, Powell suggested that the Fed might lower rates even before inflation hits the 2% target, given the recent encouraging inflation data.
Better times ahead: Since Oct. 2022, there have been concerns about whether major tech stocks, which have significantly risen, can keep outperforming. However, the anticipation of rate cuts has spurred a shift from tech stocks to small caps and sectors like real estate and financials. This is evident from the Russell 2000, a benchmark for small-cap US stocks, which has climbed ~7% in the past five days, while the tech-heavy Roundhill Magnificent Seven ETF has fallen over 7%.
