Fed will signal September cuts in July meeting: Strategist

Coming off of last Friday's knockout jobs data from May, this week could prove to be a rollercoaster for markets (^DJI, ^IXIC, ^GSPC) with Wednesday's CPI (Consumer Price Index) inflation data compounded by the Federal Reserve's FOMC meeting regarding interest rates. But just because investors are in for an eventful week, should they expect anything new to happen, particularly from the Fed?

Morningstar Chief US Market Strategist David Sekera believes the Fed's monetary policy choice to be "pretty boring" and Chair Jerome Powell's commentary to be largely "unchanged" from previous meetings.

"They'll acknowledge that the economy is slowing, but not slowing to the point that it's necessarily concerning the Fed at this point," Sekera tells Market Domination Overtime, saying the July meeting may end up being more important. "We do think the fed is going to start cutting rates at September. So if they do... I think they're going to want to give that indication to the market at the July meeting."

Sekera goes on to discuss the narrative behind inflation and recent economic prints.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination Overtime.

This post was written by Luke Carberry Mogan.

Video transcript

Let's start there, David with the Fed.

I mean, I think the central bankers have, have made it clear, David, they're in no hurry to cut.

But what are you expecting the fed to say and do this week?

You know, as far as Fed meetings go, I suspect this one is going to be pretty boring, relatively uneventful.

I expect the commentary from Chair Powell, you know, largely going to be unchanged from the commentary he's made in the past.

So I think likely he'll just mention that they still want to see additional data to get the confidence inflations on that study downward path.

I think they'll acknowledge that the economy is slowing but not slowing to the point that it's necessarily concerning the fed at this point.

So I don't think we're going to get any kind of commentary surrounding, you know, when the fed will be thinking about the fed starting to cut the federal funds rate.

I think it's really going to be the July meeting that's going to be, you know, the one that's going to be a lot more important.

You know, we do think the fed is going to start cutting rates at September.

So if they do start cutting rates at September, I think they're going to want to give that indication to the market, you know, at the July meeting.

So I think that's when they'll start providing some guidance, maybe remarking that, you know, the fed has then at that point, the higher confidence that inflation is on that downward path and maybe also mentioning and highlighting that restrictive monetary policy has been slowing economic growth.

Um What about I mean, we're all also of course, getting CP I on Wednesday morning and how confident are you that we're going to continue to see sort of deceleration in inflation that will allow the fed to start cutting as soon as September, our US economics team is still very confident that they are expecting moderating inflation in the second half of the year.

They look at a lot of different real time indicators like shelter and rent costs.

So those have been coming down for a while.

They expect those to start filtering through the next couple of months.

So really, it's just that combination of inflation starting to moderate the slowing economic growth that will give the fed the room that needs to cut.

We think that they cut at September probably skip at the next meeting and then cut one more time at December.

So our base case fed funds rate comes down to the end of the year to that four and three quarter to 5%.

Level, but we don't think the fed will be done there.

We forecast, the fed will continue to cut through much of 2025.

And in fact, by the end of 2025 our US economics team expects the fed to get down to 3 to 3 and a quarter percent.

Let's say David, uh, you know, your base case doesn't come to pass, the fed doesn't cut this year.

Would that change your view?

David, oo of the US stock market, does the market need those cuts to move higher?

We do think that they're going to need those cuts to move higher.

So right now, you know, when we look at real GDP, our base case is no recession.

We're looking for that soft landing, you know, albeit a slowing rate of growth for the next couple of quarters.

But that's also predicated on our assumption that we do think the fed, you know, starts to cut.

So if they don't cut, that could put that base case, you know, into jeopardy and, you know, we could slip into a recession, you know, early next year, you know, if that doesn't happen.

Uh David, I wanna switch gears for a sec because we've been talking a lot about technology today.

We're not done.

We're never done when it comes to this stuff.

And um we recently saw a chart uh came to us from Torsten Slack of Apollo, which happens to be the parent company of Yahoo Finance.

But, um, he's not alone in the observation looking again at the concentration of large cap tech in the S and P 500 the top 10 stocks overall in the S and P now make up 35% of that index.

Um, that's a record.

What do we make of that?

What do we do with that information?

If anything, well, like anything else, you know, it really always comes down to the fundamentals of the individual stocks now, specifically within technology, you know, the past couple of quarters, I've really kind of been breaking technology into three different buckets, you know, in my own mind.

So we have, you know, the A I and the cloud again, that's the area that has the highest growth, the best long term secular trends.

But generally speaking, those stocks are pretty fully valued, you know, if not getting to be overvalued at this point, you know, NVIDIA, we still see another 4 to 6 more quarters where demand is gonna well outstrip supply.

But even thinking about that, you know, it's a three star rated stock trading, you know, relatively close to our fair value.

You know, then I look more at the traditional tech names again, that's where we're starting to see, you know, some of the better undervalue opportunities.

My concern is that it might be a couple more quarters, you know, before some of those names, you know, start to work, see some value in the semiconductor space, the software and the service space.

Uh I still cybersecurity, uh Fortnite and Palo Alto are two stocks that we rate, you know, four stars that we think are attractive, you know.

And then lastly in t there's the legacy names, the names that we think the best days are behind them, you know, two star rated IBM, two star rated Hewlett Packard would be the two that I would shy away from.

Thanks David.

Good to see you.

Oh, thank you.