This is a big week for economic news, folks.
The Federal Reserve is holding its latest policy meeting today and tomorrow. And investors are anxious ahead of this week’s meeting, even though it’s already widely anticipated that the Fed will stand pat and leave key interest rates unchanged.
Investors are also concerned about the latest “dot plot,” which will reveal how many rate cuts the Fed anticipates this year. But that’s not all that’s on the economic docket…
The latest Consumer Price Index (CPI) and Producer Price Index (PPI) reports are also due to be released.
The reality is investors are on edge ahead of these key events, which means any surprises could impact the broader market direction. So, in today’s Market 360, we’ll spend some time talking about why the “dot plot” is important and what it could tell us about Fed policy going forward.
We’ll also preview this week’s inflation reports and discuss what the Fed needs to see in order to cut key interest rates in the future. And finally, I’ll tell you how to set your portfolio up for success moving forward.
The “Dot Plot”
This chart, updated quarterly, shows where Fed officials think key interest rates will be over time.
The last dot plot was back in March, and it showed that Fed members were projecting three cuts this year. Most agree that won’t be the case this time.
Recent reports have shown inflation remains sticky. What’s more, as we learned on Friday, the U.S. labor market remains relatively healthy. In recent weeks, we’ve also heard a string of commentary from Fed officials cautioning about the need for more data before cutting rates.
So, the big question is how drastically those assumptions from March will change in this new dot plot. Right now, the mood is pretty pessimistic. Futures markets are predicting only one rate cut this year.
However , the Bank of Canada (BOC) and the European Central Bank (ECB) both cut their respective key interest rates by 0.25% last week. In addition, central banks in Brazil, Chile, Mexico, Sweden and Switzerland have also slashed key interest rates recently.
I think this could lead to a “carry trade,” where global bond investors buy U.S. Treasuries as they seek higher rates and refuge in a stronger dollar. If these carry trades approach a trillion dollars or more, they could actually drive Treasury yields lower – and encourage the Fed to cut rates sooner rather than later.
Consumer Price Index (CPI)
The May CPI data will be released on Wednesday morning. Economists are calling for a 0.3% increase, which amounts to 3.4% on a yearly basis. It would also be in line with April’s reading.
As I’ve said many times, what we really need to see come down are the housing components – that is, Owners’ Equivalent Rent (OER), or shelter costs. The fact is shelter costs continued to be the biggest contributor to inflation in April’s report. Rent and OER each rose 0.4% in April, matching March’s rise.
The reality is we still have housing inflation here in the U.S. They don’t have this problem in Europe and Canada, partly because their populations are shrinking. This has helped rein in inflation quicker, enabling the European and Canadian central banks to cut their key interest rates last week.
Producer Price Index (PPI)
The cherry on top of this week’s economic news will come on Thursday. That’s when we’ll get a look at the PPI for May.
Economists expect the PPI to increase by 0.1% for the month, compared to 0.5% in April.
Remember, the PPI is a leading inflation indicator as it tells us details about the prices producers are paying. That’s because it tells us details about the prices producers are paying. Those prices, in turn, are usually passed on to consumers. So, if we see a substantial cooling in the PPI, we should, in theory, expect better inflation reports at the consumer and personal level.
Looking Ahead
Remember, the Fed wants to see inflation moving “sustainably” closer to its 2% target. And until they see enough evidence, rates will stay higher for longer. So, if this week’s inflation reports show that prices continue to cool, it could strengthen the case for a future cut. Check back on Thursday where our Market 360 will review these reports as well as the Fed’s latest statements.
The big question now, of course, is when those cuts will be. And that’s why Wall Street will be laser-focused on this week’s “dot plot” release and what it will reveal about the potential for rate cuts this year. Now, I’m still in the camp that the Fed will slash key interest rates ahead of the presidential election. That’s because it desperately wants to stay out of the political spotlight.
In the meantime, the market is narrowing while investors wait for clarity from the Fed. Throw the upcoming presidential election into the mix, and things only become more uncertain.
So, it’s important that you hold stocks with superior fundamentals. These are the stocks that are the market leaders right now and should climb higher – regardless of where the market turns next.
That’s also why I told my Growth Investor subscribers about a new set of AI stocks that could take off on or before November 5.
I’ll admit, my latest prediction may be a bit controversial. But I have an obligation to tell my readers about profit opportunities in the market, plain and simple.
In short, my prediction has to do with former President Donald Trump – and how, if elected, he could usher in a Second Wave of the AI boom.
As the election draws near, you’ll want to be prepared. Because a small subset of AI stocks is on the verge of massive gains.
Go here to learn more about my controversial prediction now.
(Already a Growth Investor subscriber? Click here to login to the members-only website now.)
Sincerely,
Louis Navellier
Editor, Market 360
