📉 Inflation Drops! Is the Pain Finally Over?

Good Morning!

Economic data set to influence Fed and BoE rate decisions, with U.S. retail sales and UK GDP in focus. U.S. retail sales and UK GDP reports are on deck, potentially shaking up the dollar and pound. Mild U.S. inflation has investors eyeing a September rate cut, but the size is still debatable. Across the pond, soft UK inflation sparks speculation of faster BoE cuts. It's a central bank chess game!

In today’s email:

• Fed Watch: CPI prints raises likely hood of Fed September rate cut

• Bitcoin: Bitcoin back down to $58k, more sideways action for now

• Value Stocks: historically cheap vs Growth Stocks

• Goldman Sachs: now holds over $400 million in Bitcoin ETFs!

👇Join: Our exciting community subreddit to join the conversation:

THE BIG IDEA

US inflation unexpectedly fell to 2.9% in July, marking the first drop below 3% since March 2021

This decline strengthens the case for the Federal Reserve to cut interest rates at its September meeting. The annual rise in the consumer price index was 0.1 percentage points below June's rate, undercutting economists' expectations of a steady 3%. Core CPI, which excludes volatile food and energy prices, also decreased slightly to 3.2% from 3.3% in June.

The data suggests the Fed's efforts to quell inflation are succeeding, potentially easing political pressure on Democrats in the upcoming election. David Kelly of JPMorgan Asset Management finds the data encouraging, noting it should give the Fed "further confidence" that price pressures are moving towards its 2% target.

However, a sharp decline in jobs growth earlier this month has raised concerns that the Fed may have waited too long to cut rates. Tom Porcelli of PGIM Fixed Income believes the Fed has shifted focus from inflation to labor market concerns. The August jobs report, due in early September, is now seen as crucial for the Fed's decision-making.

Investors are leaning towards a quarter-point rate cut in September, with futures markets pricing in a full percentage point of cuts by year-end

Dean Maki of Point72 suggests a larger cut would require further weakening in the labor market.

US stocks rallied modestly following the news, with the S&P 500 and Nasdaq recovering from last week's losses. Recession fears have somewhat subsided, with the probability of a larger rate cut in September decreasing from 69% to 36% according to CME Group's FedWatch tool.

Housing-related expenses drove most of the monthly CPI increase, while energy costs remained stable. President Biden welcomed the figures as progress in fighting inflation. However, with the job market showing signs of weakness and unemployment rising for four straight months to 4.3%, some economists warn of potential economic contraction if the Fed doesn't act soon. Fed Chair Powell maintains that inflation can return to the 2% target without causing a recession.

MARKETS AT A GLANCE

TOP NEWS

Investors brace for continued market turmoil, shifting from buy-the-dip mentality to cautious selling

The summer stock rout may persist into autumn, with big investors wary of further turmoil. U.S. recession fears and BOJ's surprise move have spooked markets. Asset managers are more inclined to sell than buy, citing U.S. job market weakness and global consumer trends. The buy-the-dip mentality has given way to caution, with volatility expected to continue.

Margin trading in Japanese stocks plummets after market rout, indicating retail investors' wariness

Margin trading in Japan's stock market nosedived last week, with borrowed cash for stock purchases falling by 907 billion yen to 4 trillion yen. This sharp decline followed the Nikkei's biggest single-day drop in nearly 40 years, plunging 12.4% on August 5. The retreat suggests leveraged retail traders, who account for about 20% of brokerage trading value, may remain cautious for a while.

Value investing poised for comeback due to cheap valuations, strong fundamentals, inflation trends, and potential market shifts

Value stocks are now just one-eighth as expensive as growth stocks, a historic low. Despite underperformance, value companies' fundamentals have kept pace with growth stocks. Value tends to outperform during inflationary periods, which may persist. Growth typically beats value late in bull markets, suggesting a potential shift. Fundamental indexing offers a way to gain value exposure while outpacing traditional value indices.

CRYPTO

Fed rate cuts may not be as aggressive as markets expect, potentially impacting Bitcoin's outlook

Market optimism about Fed rate cuts may be overblown, warns portfolio manager Justin Elliot. He sees risks in pricing 100 basis points of cuts by year-end, citing a fairly strong economy. This could affect Bitcoin, as lower rates typically boost riskier assets. Despite recent inflation data, Bitcoin fell 3%, breaking below $60,000. However, some crypto analysts remain hopeful for a September rate cut, which could fuel Bitcoin's climb towards new highs.

Senate Majority Leader Chuck Schumer aims to pass crypto legislation by year-end

Chuck Schumer set a goal to pass crypto legislation by the end of 2024, emphasizing the need for "common sense guardrails" while promoting innovation. Several bills are in progress, including a Senate bill on stablecoins and a House-passed market structure bill. Schumer believes bipartisan agreement is possible despite current political divisions. This push comes as crypto becomes a talking point in the upcoming presidential election, with candidates like Trump and Harris engaging with the industry.

US government moves 10,000 BTC from Silk Road seizure to Coinbase Prime, Bitcoin price remains stable

The US government transferred 10,000 Bitcoin (worth about $592 million) from seized Silk Road funds to a Coinbase Prime deposit wallet. This move is part of ongoing distributions from a larger 31,800 BTC transfer made in April. Despite concerns of a potential "government dump," Bitcoin's price showed resilience, rising 0.5% in the hour after the transfer. The US government still holds over $1 billion in Silk Road-related BTC, part of a total 213,297 BTC in government holdings worldwide.

Goldman Sachs reveals significant holdings in Bitcoin ETFs, marking a shift in stance

Goldman Sachs now holds over $400 million in Bitcoin ETFs, according to a recent 13F filing. Their largest position is $238.6 million in iShares Bitcoin Trust, with significant stakes in Fidelity's and Invesco Galaxy's offerings. This marks a notable shift from their previous skepticism, with the bank's digital assets head calling Bitcoin ETFs a "big psychological turning point" for the industry. The move signals growing institutional interest in crypto assets.

GOLD

ANZ raises year-end gold price target to $2,550/oz, citing Fed cuts and economic uncertainties

ANZ has upped its gold price forecast to $2,550/oz by year-end, driven by expected Fed rate cuts, US election concerns, and potential economic hard landing risks. While gold hasn't benefited from recent market sell-offs, ANZ predicts a rebound in physical demand, particularly from China and India. Central bank buying, though moderated, is still expected to reach 800 tons in 2024. ANZ believes any price dips will attract investment, supporting gold's value through year-end.

DAILY ECONOMIC CALENDAR (ET)

MEME OF THE DAY