September rate cut is 'in the bag': Strategist talks Fed

Equity markets (^DJI, ^IXIC, ^GSPC) are trading mixed as investors digest the cooler-than-expected June Consumer Price Index (CPI) report. Lafayette College chief investment officer Krishna Memani joins Catalysts to discuss market outlooks and Federal Reserve expectations on the heels of this print.

Memani says that June's CPI data makes a September Federal Reserve rate cut highly likely, stating it's "in the bag." However, he cautiously notes the amount of time between now and September, with numerous reports that could alter the Fed's outlook and "put a little bit of a damper on things as we saw in the first quarter of this year." Despite the positive inflation news, Memani emphasizes that valuation concerns in the market persist.

Addressing labor market considerations in the Fed's rate cut decision, with some investors eyeing a potential July cut, Memani states: "The trend in the labor market has been quite consistent. It's been slowing down for a reasonably long period of time." He questions whether the timing — July versus September — would significantly impact the state of the economy, suggesting that "the Fed's judgment would be that it probably doesn't."

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Angel Smith

Video Transcript

But first up here we got to talk about the market's reaction to that June Inflation ran coming in softer than expected.

Now, futures initially did jump following the data coming out.

And since they see saw that you're looking at gains across the down the S and P up just 1/10 of a percent the NAS that moving just below the flat there Now for all items, we did see inflation decline 1/10 of a percent month over month versus 1/10 of a percent gain.

Economists were expecting So joining us now on this we've got the money.

He is Lafayette College is CIO Christian.

Thank you so much for being here in studio.

We really appreciate it.

What does this mean for when the Fed is going to cut Is the key question, right?

Yes, yes, definitely the issue, though I think what it is implying is September is in the bag.

But we have to remember that there is still time between now and September and lots of reports that can come in that can put a little bit of a damper on things, as we saw in the first quarter of this year, having said that, I think the trend has been pretty persistent and the likelihood that the cut in September is quite high.

From a market's perspective, though, there are a couple of other issues to be mindful of.

One valuation levels for equities and the transition from a soft landing to a recession is not as gradual as people expect it to be.

And I think as you see from the consumer, if you continue to see signs of that, I think people would start questioning the growth trend, specifically the nominal growth trend, which is probably the most important thing for earnings which need to be really spectacular to support these valuations.

So does that tell us that maybe July should be on the table?

I think July should have been on the table based on today's report, but I think the Fed would like to tell ahead of time what they are going to do.

My expectation was that they probably won't tee up September, but I think given today's report, it's quite likely that they tee up September.

When did they do that?

I think after the meeting they can bring in all sorts of people throughout the next few months to kind of job on the market into that position.

Krishna, uh, chair Powell's comments down in, uh, in, uh, DC.

These past few days have largely been characterised as doves, and he was talking about some of the weakness that he's been noticing in in many economists and here on our programme and talking about some of the weakness that we've seen, the numbers clearly put it in, uh, the labour market.

I'm curious, are looking at that, and the longer we do see the Fed wait to cut rates, how much higher we could see the unemployment rate go.

So I think the trend in the labour market has been quite consistent.

It's been slowing down for a reasonably long, long period of time.

The question really is, Would July versus September?

Would that really make that much of a difference in the state of the economy?

And I think in the Fed's judgement would be that it probably doesn't so I don't think it changes the picture for what they are going to do, and employment is their second mandate, and that's what Powell was talking about.

So I think given everything that we see today, September looks a lot more likely than it would have otherwise.

When would it change?

If it were to wait until December, then we see more material weakness within Labour.

So I think the risk is the risk that they worry about.

A great deal is they basically extract a loss from the jaws of victory.

That is because they waited as long as they did.

The economy actually is in a downward trend and accelerates that.

I don't think that would be the case.

That is certainly not the base case.

But I think that's something that is in the back of the Fed's mind has been on the back of their mind and that's why they started talking about things in November because they didn't want to be too late.

This is going to start like a politics question, but I promise it's a Fed question because there is so much political volatility right now.

Obviously and uncertainty does that spotlight on the Democratic ticket take any of the pressure off of the Fed around looking too political because they don't even know which candidate they're potentially backing.

I think the Fed has been at least Jay Paul has been very clear about that, that they don't do politics, and I think we have to take them at face value if the numbers come out the way they have been coming out, the likelihood that they don't cut in September because they would look political one way or the other.

I don't think that's something that we should assign a great problem people might might, but and I think he will have to kind of defend his position in a meaningful way, and I have no doubt that they will.

But I think in the scheme of things they have done things in the past in these types of situations, and I think for us to expect that they would do something else when the economy is slowing down the way they expected it to and they have kind of laid out the path for us already.

I don't think that's very likely Christian when it comes to some of the, uh, trends that we've been seeing within the economy, I guess Are you convinced that this disinflationary story is intact and and it seems like largely consensus right now is just obviously on the heels of this print.

But I'm curious.

In terms of the future prints that you are watching outside of inflation, what do you think is the most important metric to keep an eye on?

Well, I, I think the inflation part, even even if it accelerates for one or two periods, I don't think that gets the Fed that worried.

I think right now the baton kind of their thinking baton has moved to employment report far more, far more than inflation.

So if employment kind of re accelerates for some reason, I think that takes away the incentive to incentive to cut.

Because at the end of the day, what they want to do is make sure that the economy doesn't go into a severe slowdown where they are forced into cutting very aggressively.

All right.

Krishna Mamani at Lafayette College, a chief investment officer.

Thanks so much for joining us here on set.

Thank you.