The two interventions managed by the Federal Reserve (FED) aligned with market expectations of a possible reduction in the benchmark interest rate (currently at 5.5%) by -25 basis points at its next monetary policy meeting on September 17 and 18. This is based on the understanding that the labor market is showing early signs of a greater-than-expected deterioration, with the unemployment rate reaching 4.3%.

In this context, the minutes from the last meeting outlined the path for such a rate cut, which was further confirmed last Friday by FED Chairman Jerome Powell during the annual macroeconomic symposium in Jackson Hole, Wyoming. Powell reaffirmed the institution's stance, indicating this rate cut without any doubt. This led to a rebound in the U.S. stock market, accompanied by a global depreciation of the dollar. In this environment:

• The Dow Jones closed just shy of its all-time high

• The S&P 500 was down by -0.6%

• The Nasdaq, once again driven by the tech sector, was trading at a -4% discount.

These three indices have accumulated year-to-date returns of 9.2%, 18.1%, and 19.1%, respectively. The 10-year sovereign yield dropped to 3.8%, close to the levels at the start of the year, while oil prices fluctuated with high volatility below $75 per barrel.

All of this is occurring as the summer season in the northern hemisphere comes to an end next weekend with the U.S. Labor Day holiday. Market participants are now awaiting three key data points: the PCE inflation report (August 30), employment data (September 6), and general inflation data (September 11). These figures will likely be enough for the FED to adopt the much-anticipated interest rate cuts and give the economy some breathing room after a prolonged inflationary period.

As we mentioned earlier, this week’s macroeconomic focus will be on the PCE inflation data, the FED’s preferred measure, which is expected to show that the general figure remained unchanged at 2.5% for the month, and the core figure, which excludes food and energy prices, at 2.6% (also unchanged). If either of these figures gets closer to the 2% target this coming Friday, the probability of the FED lowering the benchmark interest rate will be fully justified, even though it may appear politically motivated ahead of the U.S. presidential elections on November 5.

On the corporate front:

This week’s earnings reports will include Best Buy, Dell, Nvidia, and Salesforce, wrapping up the second-quarter earnings season. Undoubtedly, all eyes will be on Nvidia, which has been the main driver of the stock market, as investors await to see if the company’s earnings justify its market valuation. Additionally, we will be watching the developments surrounding the arrest of Telegram CEO and founder Pavel Durov in France, under the premise that the communication platform is being used by criminal organizations without the company establishing a supervision and control mechanism, as other companies do.

Meanwhile, in the political arena:

The presidential campaign is entering its final phase after Vice President Kamala Harris was formally nominated, without an electoral contest or a single formal interview, as the Democratic Party’s presidential candidate. Even the media had been patient with the candidate's lack of public exposure. However, over the weekend, media outlets aligned with her campaign, such as The New York Times, started demanding that she appear before undecided voters who are still unsure of her political and economic agenda or whether she will continue the current administration’s identity, which, for many of us, has identifiable objections.

In this edition, I will let the FED speak for itself without any interpretation, starting with the most visible paragraph from the minutes of the last monetary policy meeting:

“Nevertheless, participants considered that incoming data had increased their confidence that inflation was moving toward the Committee’s objective. A large majority noted that if the data continued to arrive as expected, it would likely be appropriate to ease policy at the next meeting. Many participants commented that monetary policy remained restrictive, although they expressed a variety of views on the degree of restrictiveness, and some participants noted that ongoing disinflation, with no change in the nominal target range for the policy rate, in itself resulted in a tightening of monetary policy.”

Powell immediately reiterated the following:

“Overall, the economy continues to grow at a solid pace. But data on inflation and the labor market show an evolving situation. Upside risks to inflation have diminished, and downside risks to employment have increased. As highlighted in our last FOMC statement, we are mindful of risks on both sides of our dual mandate. It is time to adjust policy. The path forward is clear, and the timing and pace of rate reductions will depend on incoming data, evolving outlooks, and the balance of risks. We will do everything we can to support a strong labor market while continuing to make progress toward price stability. With an appropriate reduction in policy restriction, there is good reason to believe that the economy will return to 2 percent inflation while maintaining a strong labor market. The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of further unwanted weakening in labor market conditions.”

With this, Powell gave the green light to the interest rate cut cycle without having to rush due to existing inflationary pressures, in an environment where the government admitted that recent labor data had overestimated job creation by 818,000, confirming a less robust labor market.

In the corporate world:

NASA announced last Saturday that the two astronauts stranded by Boeing on the International Space Station will have to wait for SpaceX to pick them up in February of next year due to the risks posed by Boeing's spacecraft, marking the company's second failure. Tomorrow, SpaceX will send four astronauts into space, who will perform the first spacewalk by non-NASA personnel.

In conclusion...

The FED gave the green light to lower the benchmark interest rate, an event that was well received by investors, who pushed stock prices for companies such as Coca-Cola, Goldman Sachs, JP Morgan Chase, and Walmart, among others, to their historical highs.

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