Despite signs of a slowing US economy, stock markets remain buoyant — and investors appear to be betting on an interest rate cut by the Federal Reserve as early as September, Fortune reports.
On Tuesday, the S&P 500 rose 0.52%, marking its second consecutive all-time high. By Wednesday morning, S&P 500 futures were down just 0.2%, suggesting a cautious but stable outlook from investors. The continued strength in equities comes amid a wave of weaker macroeconomic data, including declining consumer spending and signs of a cooling labor market.
According to the latest data, consumer spending fell 0.3% in May on a month-to-month basis — a sign that household demand may be losing momentum. Simultaneously, the job market appears to be softening. Analysts at Pantheon Macroeconomics are forecasting a modest 100,000 increase in June nonfarm payrolls, along with a rise in the unemployment rate to 4.3% from 4.2% in May.
These trends have fueled investor expectations that the Federal Reserve could lower interest rates by September. Historically, lower borrowing costs boost stocks by reducing financing costs for businesses and encouraging investment.
In a note to clients, Goldman Sachs economists said they had moved up their forecast for a rate cut from December to September, citing a combination of weaker-than-expected inflation pressures and emerging signs of labor market weakness.
“The very early evidence suggests that the tariff effects [on inflation] look a bit smaller than we expected… and while the labor market still looks healthy, it has become hard to find a job,” wrote Jan Hatzius and his team at Goldman.
Goldman added that changes in immigration policy and seasonal fluctuations in job data could pose further risks to employment figures in the short term — making it more likely the Federal Open Market Committee (FOMC) will act sooner.
Still, the Fed is expected to wait for more data before making any decision. At its last policy meeting, Fed Chair Jerome Powell indicated the central bank would need to see clearer signs of economic weakness before moving forward with a rate cut.
Global markets reflected the cautious optimism seen in U.S. equities. Japan’s Nikkei 225 fell 1.24% and Hong Kong’s Hang Seng Index was down 0.87% Wednesday morning. In Europe, the Stoxx Europe 600 edged lower in early trading.
