Rate Cuts Ahead?

Last week there were two important developments for markets. First, we had the FOMC meeting, which resulted in a 75-basis points interest rate hike. Secondly, new GDP numbers generated a lot of attention, showing two consecutive negative quarters of GDP growth—which is normally described as a recession. However, at the same time, some important data points continue to show signs of strength—with the labor market looking especially resilient. That brings us to the July employment report, which will be released this Friday. The consensus expects the US unemployment rate to remain at a low 3.6%, unchanged from June. A steady level of job growth is also anticipated. Despite strong job numbers, speculation is building that perhaps the Fed will begin to cut rates as soon as the first quarter of 2023, shifting their focus away from inflation and over to growth. Historically speaking, there have been points in time when the central bank has cut interest rates even when inflation is above their 2% target—so this move would not be unprecedented.

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