Traders are reevaluating the so-called Trump trades as Vice President Kamala Harris garners support among Democrats, juxtaposing political developments with the anticipated economic data and future U.S. interest rate trajectory. This recalibration occurs ahead of a significant week marked by a series of auctions, a report on U.S. economic growth, and an update on the Federal Reserve’s preferred inflation gauge.
Investors are shifting their focus back to fundamentals and Fed policy, despite the inevitable market fluctuations driven by political news. Trading based on election outcomes is often seen as speculative, with investors currently pricing in at least two quarter-point rate cuts by the end of 2024, starting in September. Policymakers are expected to maintain the key rates unchanged for an eighth consecutive meeting next week, marking a year since they first reached the current 5.25%-5.5% target range. As the July 31 announcement approaches, Fed officials have entered a communication blackout.
This week, traders are keenly awaiting key economic releases, including the second-quarter GDP report on Thursday. This will be followed on Friday by an update on the Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) Price Index. After a surprising easing in June consumer prices, largely driven by the services sector, the latest core PCE reading is expected to decline to an annual pace of 2.5% from 2.6% in May.
These economic indicators precede the Fed’s July meeting, which investors will scrutinize for any signals regarding the timing of future rate cuts. The clarity on monetary policy appears to be increasing, while fiscal policy remains fraught with uncertainties. As Fed officials prepare to outline their policy statement next week, the market’s attention will be finely tuned to their guidance amidst the prevailing political ambiguities.