Key Takeaways
- Expectations of a September rate cut rose as Tuesday’s report on consumer prices showed the annual rate of inflation held steady in July.
- Ahead of the report, Morgan Stanley analysts said small caps and lower quality stocks could do well absent “material signs of inflation pressure.”
- The outlook for stocks is supported by higher odds of a rate cut next month.
As the latest inflation print boosts expectations an interest rate cut could be coming soon, speculative stocks should stay in favor.
The S&P 500 and Nasdaq rose in recent trading after a report showed inflation held steady in July, with the year-over-year rate at 2.7%, in line with the prior month’s.
Expectations of a rate cut when the Federal Reserve meets in September have ticked up from heightened levels following a weaker-than-expected jobs report in early August. The probability of a quarter-point cut in September is now at 94%, according to the CME Group’s FedWatch tool.
Absent “material signs” of inflation in Tuesday’s print, bond prices indicating a September cut could rise, Morgan Stanley said in a Monday report. “This has the potential to catalyze a more durable rotation to small caps and lower quality stocks,” Morgan Stanley’s equity strategist Michael Wilson wrote. The firm is bullish on stocks for the next six to 12 months.
The good vibes show in investor buying activity. Clients of Bank of America last week plowed into U.S. equities for the second straight week led by institutional buyers, with inflows into single stocks reaching $4.3 billion—the largest in years, the bank said.
Ned Davis Research, which expects the Fed to cut rates in September, sees bonds gaining. “The Treasury market has always rallied going into the first rate cut after a long pause,” NDR’s chief global macro strategist Joe Kalish wrote Tuesday.
