What a rate cut could do for the market's record highs

The core Personal Consumption Expenditures (PCE) index rose 0.1% in May from April, which was in line with expectations and slower than April's 0.3% increase. The index is often referred to as the Federal Reserve's preferred measure of inflation. With numbers pointing toward cooler inflation, the possibility of a rate cut before the year's end may be back on the table.

State Street managing director Marvin Loh joins Morning Brief to give insight into the latest inflation data and its implications for Federal Reserve policy moving forward.

When asked if rate cuts could still support all-time highs in the stock market, Loh says, "I think it is supportive. I think keeping the Fed in the story from a rate-cutting perspective is powerful. You know, we're coming into earnings season. Those numbers look pretty solid, and really looking at growth expectations around earnings for 2024 as a full year and 2025. It still shows that there's strength within the corporate earnings space."

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

This post was written by Nicholas Jacobino

Trascrizione video

Stocks moving higher in early action.

We've also got yields under pressure after the fed's preferred inflation gauge showed progress on inflation.

So here to discuss what this all means for the market and what this means for the fed moving forward, we want to bring in Marvin Lowe.

He's State Street Senior Global Macro strategist, Marvin.

It's good to see you here.

So we're looking at some relief maybe in the market just in terms of what this could mean for the fed.

Do you think this print makes it more likely that the fed might act sooner rather than later?

You know what?

Um II I think at the margins, it certainly confirms a view.

If you believe that they might go in September rather than December, it's a possibility.

Um But the number came in pretty much as expected.

Um You know, it continues to show the disinflation that the fed is needing to see.

But um you know, there are still other components within the economy that it needs to get comfortable with or pulls that trigger if you will.

But, you know, certainly at, at, at, at the margin, if you thought September was a possibility, it gives you a little bit more comfort on that.

And so if September is a possibility here, one of the major things that we're trying to figure out is what employment or unemployment would take to and then ultimately as well where inflation would continue on its own trend.

What are your estimations by then?

Yeah, I mean, I mean, for sure.

So, um you know, this was a, an encouraging number.

Um you know, absolutely.

Uh One of the things that we look at uh when you, you know, kind of go through the details if you will is that these are year over year comparisons.

So um if you had very low inflation numbers last year, in order for inflation to go down this year, relative to last year, the number has to be uh uh as weak if you will.

So those base effects in terms of how we look at things become more challenging.

So you could actually see inflation tick up over the course of the next couple of months before it's stabilized.

And I think that's one of the challenges for the FED is that you're going to have this up and down kind of movement going into the fall.

So it might not be as clear as what we're seeing today.

Do you think that even in that trend that markets could continue to notch new all time highs?

Yeah, you know, I think it is supportive.

Um you know, I think keeping the fed um in the story from a rate cutting perspective is powerful.

Um, you know, we're coming into earning season, those numbers look pretty solid.

Um and really looking at growth expectations around earnings for 2024 as a full year and 2025 you know, it still shows that their strength within the corporate earning space.

Marvin, I wanna switch gears a little bit and talk about what we saw last night from the presidential candidates, former President Trump and President Biden.

And I bring this up because a lot of talk this morning about whether or not Biden is going to continue in the race.

And my question to you is how you're viewing this from a strategy perspective.

How big of a risk, maybe this potentially is the uncertainty uh to the market.

Yeah, I mean, I mean, for sure, um the performance of both candidates were, were interesting.

I'll, I'll, I'll just leave it at that.

Um You know, kind of looking at the odds market if you will.

Um you know, another Trump presidency um became a much larger um possibility ultimately.

And you know, how we look at things is that when those odds go up, you have to look at those policies that might come along with it.

And really whether or not we're talking about tariffs, whether or not we're talking about a, a much more lenient tax environment, you do wind up with inflationary pressure.

So that is certainly one of the things that are in the back of our mind, um, kind of having said that a lot can happen between now and November, um, as well as, you know, real policy versus what, uh, what, what some of these candidates might use when they're stumping around is, is often very different Marvin given that though, that there's so much uncertainty, is it likely to add to some of that volatility that we could see leading up to election day, you know, what it's going to be isolated.

You know, I think the markets generally will look at a Trump presidency as more market friendly, you know, less regulation, you know, potentially less taxes from, from that environment, it does provide support, but you're going to get nuance, you're going to get volatility in certain sectors that might benefit versus others.

Um So yes, political risk is something that you need a premium for and we're seeing that really play out in Europe as well as the other emerging markets as some of these surprises.

Keep coming up on the political side of things.

One of the parties right now seems like it's three weekends away from weekend at Bernie's.

So all of these things considered.

If we were to see a swap in or some type of new candidate emerge from the Democratic Party, what would that do for markets?

What would the reaction be there?

I mean, you said that rather than I did.

Right.

But, um, uh, you know, we'll certainly pass the, um uh the viability of that candidate.

Um, you know, it does come down to six states, it comes down to how those candidates are divided.

Um And really the calculus, if another candidate, it emerges, how, how successful can they be?

Um Does it really change the concern that the Democrats have now and really the way the markets are leaning more heavily, um that the debate really assisted another Trump administration, Marvin Lowe State Street, Senior Global macro strategist, Marvin.

Thanks so much for taking the time here with us this morning.

Thank you.