The next Federal Reserve meeting is still six weeks away, and a lot more data on inflation, the job market and consumer spending will come out in the meantime. But for what it’s worth, investors are now of the mindset that the Fed won’t have to raise rates as aggressively as previously thought come September 21.
Before the release of Wednesday morning’s CPI report, fed funds futures trading on the CME were indicating that the market was pricing in a 68% chance of another three-quarter point rate hike in September.
But after the better than expected inflation news was released, odds for that big of a hike have fallen to just 37.5%. In other words, Wall Street is now expecting a 62.5% chance that the Fed will raise rates by just a half-point at its next meeting. That’s up from odds of only 32% for the smaller increase a day ago.
Looking out further, there are growing expectations that the Fed will be even more relaxed with rate hikes beyond September. Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research, said he thinks the Fed may boost rates by only a quarter of a point at its November meeting, and then hit pause after that.
Hopes of a slower pace of Fed tightening helped fuel the market rally Wednesday. But what’s particularly noteworthy is that many of Wall Street’s biggest winners are stocks with ties to the housing market.
Builders DR Horton (DHI), Pulte (PHM), NVR (NVR) and Lennar (LEN) soared. So did home products and furnishings manufacturers such as Whirlpool (WHR), Sherwin-Williams (SHW), carpet maker Mohawk (MHK) and plumbing supplies company Masco (MAS).
Investors appear to be betting that housing sales, which had started to cool as prices and mortgage rates climbed, may not fall off a cliff after all if the Fed becomes less aggressive.