Fed's Next Move: 'Interest Rate Cut'?..."55% Chance of September Hike"

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Expectations are rising on Wall Street that the next catalyst for the U.S. stock market's rise could be an interest rate cut by the Federal Reserve (Fed), rather than an interest rate hike. This analysis suggests that the Fed's need for further tightening has decreased due to a combination of slowing employment and a sharp rise in long-term Treasury yields.

According to Barron's, a U.S. economic news outlet, on August 7 (local time), Wall Street expects non-farm employment to increase by 97,000 in July. The unemployment rate forecast is 4.2%, the same as in June. If job growth slows and wage and price pressures ease, there is a possibility that the Fed's next interest rate adjustment could shift from a hike to a cut.

Dennis DeBusschere, Chief Market Strategist at 22V Research, analyzed that an unemployment rate of 4.2% could create a positive environment for the stock market. He stated, “4.2% opens the door for investors to focus on strong fundamentals.” Conversely, he explained that if the unemployment rate falls below 4.1%, concerns about the Fed's tightening could intensify again.

The bond market is already tightening financial conditions on behalf of the Fed. The U.S. 10-year Treasury yield rose 17 basis points over a month, reaching 4.638%. The 30-year Treasury yield jumped over 32 basis points in about a week, rising to its highest level since 2007. The Fed had kept interest rates frozen for seven consecutive months until June, and the last rate adjustment was a cut in December last year.

The artificial intelligence (AI) investment frenzy has also been identified as a factor pushing up long-term interest rates. AI-related investments by the four major hyperscalers, including Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), and Meta Platforms (META), are expected to exceed $750 billion this year. They are projected to reach at least $1 trillion next year. Barry Knapp of Ironsides Economics analyzed that high real interest rates and widening credit spreads are curbing overheating in AI infrastructure investment. The probability of a September interest rate hike has decreased from 80% in July to 55%.

The situation in the Middle East and international oil prices remain variables that could reverse interest rate forecasts. Brent crude has fallen more than 20% since late July but is still more than $10 per barrel higher than last year. Knapp did not anticipate an interest rate hike this year and suggested the possibility of the Fed shrinking its $6.7 trillion balance sheet in response to oil-price-driven inflationary pressures. Barron's analyzed that if employment slowdown, oil price stability, and the market's own financial tightening continue, expectations for an interest rate cut early next year could strengthen. If these conditions align, there is also a possibility of the S&P 500 rising to 8,000.

[Article Key Summary]

-Wall Street projects 97,000 new U.S. jobs and an unemployment rate of 4.2% for July, focusing on the possibility that the Fed's next rate adjustment will be a cut.

-The U.S. 30-year Treasury yield surged over 32 basis points in about a week, reaching its highest level since 2007, putting pressure on financial conditions.

-With AI investment and oil prices remaining key variables, a forecast has been made that the S&P 500 could rise to 8,000 if expectations for interest rate cuts grow.

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