July 10, 2024: Why Interest Rate Cuts Are Becoming More Likely

The Fourth of July holiday may have shortened last week’s trading schedule, but the holiday could not keep investors from growing increasingly focused on the probability of interest rate cuts to come. The bond market has reflected as much with 2-year and 10-year treasury yields falling 0.11% and 0.15% percent, respectively, over the past week. Falling rates have also helped the so-called “long-duration” (i.e., growth) stocks continue their rally. Year to date, the Russell 1000 Growth index has returned 25.3% while its Value counterpart has returned 6.3%.

Last week’s economic data signaled a cooling economy which, when combined with slowing inflation in April and May, suggest that rate-cut hopes are well founded. Headline job growth of 205,000 in June might suggest a red-hot labor market. Downward revisions to April and May—and other signs of moderation, including an uptick in the unemployment rate to 4.1%—indicate that the labor market, on balance, is slowing, however. A slowing labor market should ease pressure on wages and prices, giving the Federal Reserve further support to move forward with rate cuts. Lower-than-expected figures from July’s ISM manufacturing and services indexes further suggest that economic activity is moderating.

In addition to Independence, lower interest rates—or rather the hope thereof—offered many investors additional reasons to celebrate last week.

Weekly Market Update: July 10, 2024