Several key economic prints, like July's Consumer Price Index (CPI) and retail sales report, are due out this week as investors eye the Federal Reserve's first interest rate cut. Kace Capital Advisors managing partner Kenny Polcari joins Morning Brief to discuss the state of the market and how these economic data points will play into the Fed's decision to cut rates.
After last week's intense market volatility, some investors started pricing in a 50-basis-point cut from the Fed at its September policy meeting. However, Polcari believes a 25-basis-point cut is more likely. As more economic data comes out this week, he expects some market volatility to continue, encouraging investors to practice patience:
"Investors need to understand the data that's coming. They also need to understand August is kind of a funny month, right? There's a lot of people on vacation, so there's a lot less volumes. And so moves can be exaggerated in either direction based on the data that comes out. So don't put too much thought into it as you have to kind of watch as the market reacts to the data without getting too impatient."
Let's kick it off with the markets because those key inflation data prints that are going to be out this week are going to give us a little bit more insight maybe onto the Fed's next moves on rates. Bank of America CEO Brian Monehan urging the Fed to cut rates in September. In an interview over the weekend, he said quote, "It's time for the Fed to take the restrictions off." Joining us now to discuss what's next, we want to bring in Kenny Polcari. He is Case Capital Advisors managing partner. Kenny, it's great to see you. So, let's just first take a step back. Coming off what was last week, a very, very tumultuous week here for the markets. We're setting up for what could be another volatile week here for stocks. What should investors be doing or anticipating here ahead of those key econ prints that we will be getting?
Well, a couple of things, right? Good morning. Nice to have you. Nice to be with you. Uh, a couple of things, right? Last week was a very, very volatile week. On Monday, there was a lot of internal damage done to the market. So investors need to understand that it's going to remain volatile. We're probably going to have to retest those lows over some period between probably now and the end of the end of the month. Tomorrow's, uh, tomorrow's PPI and Wednesday's CPI are going to be key factors in inflation. They are supposed to come in a little bit better than the expectation. So that's going to, you know, that's going to help the argument that the Fed needs to start cutting rates. Does the Fed need to start cutting them drastically by a half a basis point or three quarters of a basis point? I don't think so. I think a 25 basis point move, uh, is really what the market is expecting. I think that's what a lot of economists are expecting, but I think street analysts are expecting for a bigger move, which I think would be a mistake. So, I think investors need to understand the data that's coming. They also need to understand August is kind of a funny month, right? There's a lot of people on vacation. So there's a lot less volumes, and so moves can be exaggerated in either direction based on the data that comes out. So don't put too much, uh, uh, thought into it as you just, you have to kind of watch as the market reacts to the data without getting too impatient, right? Patience at this time is very much a virtue.
Kenny, do you think there's a chance that we are over pricing the likelihood of a huge market reaction to this data print given that the market has particularly been concerned about the labor market so far versus the inflation data, and the real question has been about a growth scare, not about an inflationary scare.
I think the market is now very sensitive. It's overreacting to both the, you know, to all the economic data that comes out, right? If the CPI number is better than expected, I would expect another overreaction, demanding that the Fed needs to cut rates, they need to cut it sooner rather than later. They need to make a big, make a bigger cut. I think the Fed is actually doing the right thing, especially after last week's, uh, uh, Monday move and the calls for an emergency rate cut meeting, and "Oh my God, the world is coming to an end." In fact, they sat back and they said, "Slow down. We're watching it. We understand, we have it under control." And look, the market kind of rebalanced, did not completely, which is why I think there's still concern. But I think you have to be careful, especially in August, that the market reacts overreacts either way to the to the, uh, to the expectation. Although I do think that there is there is some reality to a slowing growth story. Not necessarily a crash, but certainly a slowing growth story, and that's okay considering from where we came.
Well, so then, Kenny, what do you make of the comments from Bank of America CEO, Brian Monehan, really pushing for a September cut. If we don't get a cut in September, there's lots of talk about 50 basis points, but what if we don't even get 25? Would that be a mistake?
I I don't I think we are getting a cut in September. I think we're going to get 25 basis points. I think actually a 50 basis point would be the mistake. I don't think at this point, as long as long as the data, you know, continues to be what it is, and the CPI and PPI continue to be better, I don't see how the Fed cannot cut. They prepared the markets for a cut. They've been talking about it. They didn't prepare the markets for a July cut and so we didn't get one. But they are preparing it for a September cut, and I think 25 basis points is right, and I think Monehan is correct.
Why, Kenny?
But Kenny, why would 50 be wrong? Is it just because that risk that you still see here to the upside for inflation?
No, I think 50 would be wrong because 50 in my mind would suggest that, you know, they're that the Fed is behind the eight ball, and now they're trying to play catch up because they see something more negative on the horizon. So I think 50 basis points just gives the impression that we missed it, we're trying to catch up and that would that would create some concern. I think if they stick to 25, that's what they've been saying all along, I think that would help the market smooth out.
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He notes that the market is "very sensitive" to economic data and warns that if July's CPI print comes in above expectations, there may be an overreaction as investors demand a rate cut from the Fed. He believes a 50-basis-point cut would be a "mistake" as it would signal that the Fed is "behind the eight ball, and now they're trying to play catch up because they see something more negative on the horizon."
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This post was written by Melanie Riehl