Stock Market: CPI Inflation Report Sends Fed Rate Hike Odds Lower

[00:00:00] Speaker 1: The CPI Inflation Report was released today and the results came in better than expected. The report says that the rate of inflation has now fallen to 3.5%. The market was expecting 3.8%. And the reason for the decline was primarily attributed to falling energy prices. So here's how the rate of inflation has been faring. And of course, this is according to the CPI Inflation Reports. So the report that was released today, July 14th, was the rate of inflation for June. In May, the rate of inflation was at 4.2%. June came in at 3.5%. So that was a big improvement month over month. And that was actually the largest monthly drop since April of 2020. Now, I just want to say that some people, some institutions prefer to look at core inflation. So this measurement strips out food and energy prices. And because of that, it's going to be less volatile, especially nowadays if you strip out energy prices. So in May, core inflation was at 2.9%. In June, it was at 2.6%. Okay, going back to headline CPI inflation, which is at 3.5%. I want to give a quick recap of what happened and how we got here. So energy prices started shooting up when the Iran war broke out. And then the energy index went up nearly 20% on an annual basis. And then due to the MOU and lack of escalation up until the end of June, energy prices started to decrease. And then the energy index fell by 5.7% in June. And then this substantially helped the June results of course. So I understand that there's been escalation since, but that's going to be for the July reports that gets released in August. Now, at the time of making this video, markets reacted positively to the better than expected rate of inflation results. So stocks are up, bonds are up, precious metals are up, cryptos up. Now they're all up. And a good question is, why is this happening? It's because if the rate of inflation is lower, or if the rate of inflation is falling, then there's less of a need for the Federal Reserve to raise interest rates to fight inflation. And of course, raising interest rates, that's bad for stocks, that's bad for bonds, precious metals, and also for crypto. And now due to a lower rate of inflation, and you know, it beat the expectations, the odds of a rate hike are actually going down. So I want to show you the odds. And this is according to the CME FedWatch tool. The next Federal Reserve meeting is going to conclude on July 29th. And before the release of the CPI inflation report, the odds that the Federal Reserve would increase interest rates at that July meeting was at 41.7%. So that was as of yesterday, before the report, of course. Now after the report, the odds of a rate hike have decreased from 41.7% to now 16.6%. And there's an 83.4% chance that they're not going to change interest rates at the July meeting. So like I told you before, I don't expect the Federal Reserve to raise interest rates in July. Okay, now I want to show you this. So I found this very interesting. You're looking at the odds for the Federal Reserve's meeting in September. So here's what happened. Before the release of this report, the market expectation was that there's a 51.2% chance that the Federal Reserve will raise interest rates by September. Now after the report, the odds of a rate hike increased from 51.2% to 52.4%. So it's a slight increase. Nevertheless, it's an increase. So essentially, what happened is that the odds of a rate hike by a quarter point decreased for July, but actually increased for September. And now I want to show you this because it gets more interesting. Before the report, there was a 23.9% chance that the Federal Reserve would raise interest rates two times or by zero point five percent by September. Now after the report, the odds have fallen from 23.9% to 8.9%. So it's a huge decrease. So it appears that the market is debating whether the Federal Reserve is going to increase interest rates one time or not, rather than are they going to increase interest rates by one time or two times. Therefore, I would say that overall, the results were taken positively by the markets. There's a lower expectation for a July rate increase and a much lower expectation for the Federal Reserve to increase interest rates twice by September. And this is the last one that I want to show you, expectations by the end of the year. This is the Federal Reserve's last meeting for the year. It's going to be in December. So the market expectation is that there's only a 17.8% chance that interest rates will be the same by year end. So that's actually improved after the report today. So it went up from 10.7% to now 17.8%. But I'll tell you, and you can see for yourself right there, there's still an 82.2% chance that interest rates will be higher by the end of the year compared to right now. A 41.1% chance that they raise interest rates by 0.25% by the end of the year. A 31.1% chance that they raise interest rates twice. A 9.1% chance three times. And a 0.9% chance that they raise interest rates four times by the end of the year. And there's actually a 0% chance that interest rates will be lower by year end. Now, I completely acknowledge that saying never say never, but that is the market expectation and interest rate cuts, you know, at this point in time, the expectation, it's not even on the table. 0%. Now it's this more restrictive monetary policy expectation that it's been acting as a headwind for the markets. Now, I just want to say that that doesn't mean that markets can't go up. It just means that it's going to be more of a challenging environment for markets. But additionally, you got the jobs report, the inflation reports, the situation in Iran, there's some kind of crisis that could happen. All I'll say is that the odds can change overnight very rapidly. And that's especially true. You know that it's very true in this news driven market in this day and age. Okay. Now, if you want to know my opinion about the situation, well, if you know me, you probably know what I'm going to say. First of all, 3.5% headline CPI inflation. That is a government reported figure with their government calculations. Like I am skeptical of that figure. So as I showed you my calculations in earlier videos, the federal reserve is printing at a rate of 6%. The money supply is growing at a rate of 7.5%. Okay. So 3.5%. I'm skeptical. Like I'm just being bluntly honest with you, but I guess I'll have to take their word for it. But yeah, I will admit that the rate of inflation is improving, which is great. Like you see it with the price of oil, you see it at the pump, but please understand that I am acknowledging that the rate of inflation is decreasing, but prices overall, they're still continuing to increase because inflation is at 3.5%. And that means that prices are still going up at a rate of 3.5%. It's not negative. It's not like prices are coming down and we're still well above the federal reserve's target. Now, going back to this rate expectations by year ends, just take a look at how skewed it is, like the expectation for a rate increase. Now, a good question is what is it going to take to increase the odds of no change to interest rates, basically no rate increase, and even have the market expect the possibility of a rate cut. So I'd say it's going to be one of two things. So the first thing is that, well, if you want, if you want there to be market expectations of a rate decrease, then energy prices would have to remain suppressed. And that means no escalation in the war, which means improving traffic flow in the Strait of Hormuz. Like that's what ultimately boils down to. And or because that was the first thing, the second thing that I'm going to say is weakness in the labor markets. So I'll just say that if the labor market data is weak, then the federal reserve is incentivized to cut rates in order to boost the labor market, because the federal reserve is a dual mandate. However, I'll tell you, and if you've been watching, then you know that the jobs reports, like they've been coming in decent, not great, but then again, not horrible either. But if the rate of unemployment were to go up, then it would probably bring back rate cut expectations. Honestly, like I don't think that's going to be the case. So I would honestly say that it's going to be most dependent on the Iran situation. So there's always going to be the possibility of a black swan events. But of course, because those are unpredictable, I'm just going to leave that one out of the equation. I hope that helps keep you up to date on the situation. Please subscribe. Thank you for the support. And I wish you a very nice day. Take care.