PCE shows July rate cut has 'reasonable chance': Strategist

The latest Personal Consumption Expenditures (PCE) data released Friday morning showed a reading of 2.6%, igniting investor optimism for a near-term Federal Reserve rate cut. Michael Green, Chief Strategist at Simplify Asset Management, joins to discuss the economic outlook in light of this latest report.

Green highlights that the PCE data revealed "one of the fastest slowdowns in inflation" since 1972. However, he cautions that if this disinflation trend persists, the economy could potentially face "some areas of deflation going forward." Nevertheless, Green suggests this print still offers "a reasonable chance" for a near-term rate cut.

Regarding the timing of a potential rate cut, Green believes it could materialize as soon as July. He states, "We could very well see a very positive inflation print coming in next month that might open the door for those Fed rate cuts."

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This post was written by Angel Smith

Transcripción del video

You get a read like the one we got this morning here.

What is that signal for the reality of what the rate policy pathway could look like from here.

From your perspective, Michael?

Well, from my perspective, what we've seen is among the fastest slowing of inflation on a year over year basis, basically in history, um really since 1972.

So we've seen an extraordinary deceleration in the rate of inflation.

And that's very frustrating for a lot of people because they're focused on the price level.

You mentioned the barbecue, when we look at those costs, they are absolutely higher than they were to three years ago in some cases by a significant amount.

But that rate of change has now slowed.

And the real risk is that the rate of slowdown continues, we find ourselves in some areas of deflation going forward.

And so as we're continuing to monitor the the daily undulations of the CME fed watch tool, what is your estimation for when we could see that first rate cut?

Well, I think there's a an outside probability.

Uh Right now the market is only pricing about a 10% probability of a rate cut in July.

I think there's a reasonable chance that that should be a little bit higher, particularly because we have another CP I data point coming in in the next month.

One of the criteria, one of the uh dynamics that seems to be in play is that the seasonality has reasserted itself in a meaningful way when companies raise prices on an annual basis, they're catching up to price increases.

That happened last year over the residual of the year that's created higher January and February prints for the past couple of years.

And now we're seeing that back away, we could very well see a very positive inflation print coming in next month.

That might very well open the door for those fed rate cuts.

Let let's talk about some asset management strategy as well.

Then if, if we do see a pull forward of that cutting cycle and, and when it begins, what does that mean for the markets as well for people who are trying to figure out how to position their portfolio?

Does that mean a pivot?

Does it turn into a sell the news event when we start to see those cuts?

How do they evaluate that?

So I think this is going to be the really interesting question because candidly, we actually don't know, we have a segment of the market that has done extraordinarily well, the high flying technology names the large catch rich companies at the same time, we're seeing struggling, many of the companies in the Russell 2000 remain 20 to 30% off their highs from 2021.

We're now seeing the risk that those could actually begin to decelerate faster if the economy begins to slow.

So far, we've had a combination of high profit margins and relatively robust growth that has kept businesses largely on track.

But we are just like the population of the United States, the households in the United States.

We're seeing a radical bifurcation where the weakest companies are getting weaker, the more credit sensitive companies are becoming more stressed.

And at the same time, companies like Microsoft Apple, et cetera that have significant cash balances, no financing needs.

They've done extraordinarily well, if that process starts to reverse fast enough, we could see relief for the smaller companies and the more leveraged companies.

If it doesn't come fast enough though, you start to enter what I call a phase change where credit availability and credit um ratings effectively, credit performance begins to become a really critical issue.

We've seen this in prior cycles.

It's unclear whether the fed is going to get ahead of that or allow itself to fall behind because of the fear of inflation does relief for smaller companies trigger a rally for small caps that have been absent from some of the run up that we've seen thus far this year.

That would be the hope right that you would begin to see the market start pricing in some of that relief and some of that improved opportunity.

But again, these tend to be economically cyclical companies.

They're continuing to operate with relatively high margins.

And so if we start to see that deteriorate, it's just a question of, does it happen too fast for the fed to actually react?