A Rate Cut Is Firmly on the Table

Bulls maintain control for now

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Our View

I’ve been adamant all last year and throughout this year about no rate cuts, but now I have to jump ship and say we will see a rate cut in September — and possibly one more before year-end. 

However, this is all data-driven, and as we all know, data can change quickly. The Fed is widely expected to keep rates steady at its meeting later this month. However, as of Friday, traders were pricing in a 94% chance that the central bank will cut interest rates in September, according to CME Group data — up from 78% a week ago. I can’t ignore that!

I’m uncertain about how the attempted Trump assassination will affect the markets, but one thing is certain: if Trump gets re-elected, one of his first actions will likely be to start lowering rates.

MiM and Daily Recap

The ES traded in a 10-point range until the June PPI showed +2.6% vs +2.3% expected. It made a low at 5621.25 at 8:40, rallied up to 5646.75, and opened Friday’s regular session at 5646.00. After the open, the ES traded down to 5642.50, then rallied up to 5687.75 at 11:10. From the low to the high, 438k ES contracts traded. After reaching the high, the ES pulled back to 5682.75, then made a new high by 3 ticks at 5688.50 before dropping down to 5671.75 at 12:10. After a bump up to 5679.50, the ES ticked-down to 5675.00 and itt was this low that set up the push to 5708.25 at 1:58. The ES then pulled back to the 5697.75 area, rallied up to 5705.75 at 2:12, and traded in a narrow back-and-fill pattern.

Subsequently, the NQ started showing weakness, dragging the ES down to 5673.25 at 3:48. At 3:40, the cash imbalance showed $4 billion to sell, causing the ES to sell off further to 5661.50. It then popped back up to 5674.50 and traded back down to 5667 by the 4:00 cash close. After 4:00, the ES rallied back up to 5674.50, dropped 5 points, and traded in a narrow range until settling at 5667.50, up 27.50 points (+0.50%). The NQ settled at 20,539.75, up 98 points (+0.58%).

In the end, the ES saw varied movements but maintained a firm tone overall. Total volume remained steady at 1.6 million contracts traded.

While both the ES and NQ have seen strong gains over the past few weeks, the Dow crossed over 40,000 for the second time in history, and even the Russell 2000 saw some buying interest (+6% for the week). Reflecting on the net changes over the last 3.5 months, April was challenging as the ES struggled after coming off a high, but the “sell in May and go away” strategy didn’t perform well. May started at 5102.75 and made 9 new highs up to 5407.50. Of the 23 sessions, 14 were up, 1 was a scratch, and 8 had lower closes, mostly modestly down. 

June began at 5359.75, with 13 up sessions out of 20, and July started strongly, with the first 7 days all seeing higher highs and closes: July 1 at 5533.75, July 2 at 5568.75, July 3 at 5590.25, July 5 at 5621.50, July 8 at 5625.25, July 9 at 5631.25, and July 10 at 5688.00. July 11 and 12 saw closes at 5639.55 and 5664.75. 

Altogether, there were 42 sessions: 38 were up, 17 were down, and 1 was a scratch. From the May 1 settlement at 5102.75 to Friday’s high at 5708.25, there was a gain of 605.5 points, averaging 14.6 points per day. 

The bottom line? Small pullbacks and significant rallies prevailed.

Technical Edge

Guest Post — Stock Trader’s Almanac

My good friend Jeff Hirsch put it really well in a recent post, titled: Rate Cut Odds Improve – Thank You Lower Energy Prices. (I would suggest signing up for these posts, by the way!)

Improving odds for a Fed rate cut have triggered a rotation out of tech stocks and into small-cap stocks. The Russell 2000 is currently up around 3% (as of 12:30pm est.) while NASDAQ 100 is down 2%. A better than anticipated CPI reading from the Bureau of Labor Statistics was the catalyst. Energy was responsible for the bulk of the headline month-over-month decrease in CPI. Food prices continued to creep higher as did shelter costs. Nonetheless, odds of a September rate cut, according to the CME Group’s FedWatch Tool have increased to 94.5%. 

As you can see in our updated CPI projection chart, the monthly change in CPI still has to average 0.1% or less through January 2025 before the 12-month change falls below the Fed’s stated 2% target. It would still likely take two more month-over-over CPI readings of unchanged or negative to spur the Fed into action. With crude oil price rebounding throughout much of June and into early July, this may not happen before the Fed meets in September.

Economic Calendar

For a more complete Economic Calendar see: https://mrtopstep.com/economic-calendar/

Disclaimer: Charts and analysis are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.

Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!