The article highlights a shift in market sentiment regarding Federal Reserve interest rate policy, moving from expectations of rate cuts to a possible rate hike as inflation remains elevated. Recent consumer and producer price index data indicate sustained inflationary pressures, influenced by geopolitical events such as the Iran war.
CME Group fed funds futures now show a 50% chance of a quarter-point hike at the October meeting and a 79% chance by December, a significant change from just weeks ago when such a hike seemed unlikely. The author, Todd Gordon, believes that while the market can handle the end of the easing cycle and a potential rate hike, volatility is expected as investors adjust to this new reality.
He uses historical data to illustrate the correlation between energy prices and inflation expectations, suggesting that if inflation remains below 2022 highs, significant rate hikes may not be necessary. The article also discusses the performance of growth stocks, particularly in the Nasdaq, and the potential for continued gains in the AI-led growth trade if inflationary pressures stabilize.
Gordon warns that if inflation continues to rise, defensive measures may be necessary for investor portfolios, similar to strategies employed in 2022