powell – Evergreen Financial News

When the Fed cuts rates, the market reacts differently depending on why the cut is happening (growth slowdown vs. financial stress vs. inflation under control). But here’s the typical playbook:

📉 Bonds

Short-term Treasuries (2Y, 5Y): Yields drop the most — directly tied to Fed policy.
Long-term Treasuries (10Y+): Can fall too, but if markets worry about inflation, the drop is smaller.
✅ Net: Bond prices rise, especially in the short end.

📈 Stocks

Growth / Tech: Big winners → lower discount rates boost valuations.
Small Caps: Benefit from cheaper borrowing costs.
Financials: Mixed → lower rates can compress bank margins, but more loan demand helps.
Defensives (utilities, staples): Often lag in a rate-cut rally.
✅ Net: Stocks rally short term, but if cuts signal recession fears, gains can fade.

💵 U.S. Dollar

Rate cuts usually weaken the dollar (lower yields make USD less attractive).
But if other economies are weaker, the dollar can still hold up.

🪙 Gold & Commodities

Gold: Bullish — lower real yields + weaker USD.
Oil / Industrial metals: Could rise if cuts are seen as boosting demand.

⚖️ Context Matters

Soft Landing Cut (inflation down, economy stable): Markets cheer → risk assets surge.
Recession Cut (jobs + growth collapse): Initial rally, then volatility as earnings outlook worsens.

✅ Bottom line:

Near-term: Stocks and bonds likely rally, USD softens, gold rises.
Medium-term: Market reaction depends on whether the cut is a “confidence boost” (bullish) or a “panic cut” (bearish).

Here’s a scenario matrix for the upcoming Fed decision, given the backdrop of weak jobs + sticky inflation:

📊 Fed Rate Cut Scenarios & Market Reactions

1) 25 bps Cut (Base Case / Cautious Easing)

Stocks → Mild rally. Growth/tech up, but not euphoric since it looks cautious.
Bonds → Short-term yields drop modestly, curve stays inverted.
USD → Slightly weaker, but not a major selloff.
Gold → Edges higher (real yields lower).
Message → Fed balancing act → “We’re watching inflation, but also supporting jobs.”
✅ Market interprets as a measured soft-landing approach.

2) 50 bps Cut (Dovish Surprise)

Stocks → Initial surge (risk-on). Tech + small caps lead.
Bonds → Big rally in short-term Treasuries, yields drop fast.
USD → Weaker — carry trade flows out of USD.
Gold & Commodities → Spike higher (gold: real yields collapse, oil/commodities: demand optimism).
Message → Fed more worried about growth than inflation.
⚠️ Market may later question: “Do they know something worse about the economy?”

3) No Cut (Hawkish Hold)

Stocks → Selloff, especially growth/tech. Cyclicals under pressure.
Bonds → Short-end yields jump → curve flattens/inverts more.
USD → Strengthens → global risk-off.
Gold → May hold up (as risk hedge), but no strong rally.
Message → Fed prioritizing inflation fight over jobs.
⚠️ Market sees this as policy risk → tightening into slowdown.

🔑 Big Picture

A 25 bps cut is most likely and would calm markets.
A 50 bps cut sparks a short-term rally but raises recession fears later.
No cut shocks markets → likely worst short-term outcome for equities.

Great — here’s a sector-by-sector breakdown for the 3 Fed rate cut scenarios:

📊 Sector Impact by Fed Cut Scenario

1) 25 bps Cut (Measured Easing – Base Case)

Tech / Growth: ✅ Positive, steady rally as discount rates ease.
Financials (Banks): ⚖️ Mixed — loan demand improves, but margins narrow a bit.
Energy / Materials: ➕ Mildly positive if demand outlook stabilizes.
Real Estate (REITs, housing): ✅ Relief — borrowing costs dip slightly.
Consumer Discretionary: ➕ Positive — cheaper credit supports spending.
Utilities / Staples: ⚠️ Laggards — less defensive demand in a modest risk-on environment.

2) 50 bps Cut (Dovish Surprise – Aggressive Easing)

Tech / Growth: 🚀 Big winners, as valuations re-rate higher.
Financials (Banks): ❌ Negative — sharp margin compression, weak outlook for profitability.
Energy / Materials: ✅ Strong upside — demand optimism and weaker USD boost commodities.
Real Estate: 🚀 Big rally — mortgage rates drop more aggressively.
Consumer Discretionary / Small Caps: 🚀 Strong — cheap credit + weaker USD helps exporters.
Utilities / Staples: ⚠️ Underperform — money flows into growth sectors instead.

3) No Cut (Hawkish Hold – Surprise)

Tech / Growth: ❌ Hit hard — higher discount rates weigh on valuations.
Financials: ✅ Slightly positive — higher rates protect bank margins.
Energy / Materials: ❌ Weak — growth slowdown fears outweigh any inflation hedge play.
Real Estate: ❌ Selloff — mortgage rates remain high, housing demand weakens.
Consumer Discretionary: ❌ Negative — consumers squeezed by higher borrowing costs.
Utilities / Staples: ✅ Defensive inflows — investors rotate to safe havens.

🔑 Takeaway

25 bps = “steady glide path” → broad but modest rally.
50 bps = “all-in easing” → growth sectors rip, but banks suffer.
No cut = “hawkish surprise” → broad equity selloff, defensives + banks hold up best.

The latest PPI numbers indicate that inflation pressures at the wholesale/producer level are easing overall, even though a few service categories are still running hot.

🏦 Impact on markets & the Fed:

Bond market → Likely to rally (yields fall) since cooling PPI supports the case for Fed rate cuts.
Equities → Could get a boost, especially rate-sensitive sectors (tech, real estate, small caps), as investors price in lower borrowing costs.
USD → Could weaken if markets see softer inflation + higher odds of rate cuts.
Commodities → May drift lower if weaker input prices persist, though energy and food can swing independently.

🔑 Takeaway:

PPI is an early signal. If it continues trending down, it strengthens the Fed’s case for easing policy. But if consumer inflation (CPI/PCE) stays sticky, the Fed may still tread carefully.

Here’s what the latest PPI (Producer Price Index) numbers show — and what they’re likely to mean for markets / policy.

🔍 What the Data Says

From the U.S. Bureau of Labor Statistics:

PPI for final demand declined 0.1% in August (seasonally adjusted).
On a year-over-year basis, producer prices rose 2.6%.
Core PPI (excluding food, energy, and trade services) rose 0.3% month-over-month for August.
Final demand services dropped ~0.2% for the month. Final demand goods rose about 0.1%.

So, broadly: wholesale inflation cooled in August, with some price pressures still present (especially in core PPI), but not accelerating.

⚙️ What It Indicates

A few key takeaways from these numbers:

Cooling Inflation Pressures Upstream
- The drop in final demand services suggests companies aren’t easily passing on price increases (for services/trade).
- Goods inflation is modest, which means upstream input costs aren’t surging out of control.
Core Inflation Remains Sticky but Manageable
- The core PPI rise (excluding volatile food, energy, trade services) shows that inflation in some sectors is still active.
- But with final demand overall dipping, there’s potential for this to feed into lower consumer inflation over time.
Tariffs & Trade Pressures May Be Easing
- Some analysts point out that import/wholesale price effects from tariffs and disrupted supply chains might be moderating or getting absorbed.
Supports Case for Fed Rate Cuts (But Cautiously)
- Softer wholesale inflation gives the Federal Reserve more wiggle room to consider easing.
- However, the Fed will still want to see CPI or PCE inflation behaving similarly before acting aggressively.

📈 Likely Market / Policy Reactions

Given this PPI report, here’s how markets and policymakers are likely to respond:

Asset / Policy	Likely Impact
Stocks	Positive overall. Especially rate-sensitive sectors (housing, tech) should benefit from the idea that inflation (and thus rates) may be under control.
Bonds	Yields (especially short-term) likely drop as traders increase the probability of a Fed rate cut. Bonds rally.
U.S. Dollar	Probably weaker, as rate expectations ease and real yields diminish somewhat.
Gold / Safe Assets	Likely to gain, as inflation remains present but not accelerating dramatically — safe havens tend to benefit in that environment.
Fed Policy	A 25 bps cut seems more likely; bigger moves would hinge on additional weak data (CPI, labor). The Fed would probably proceed carefully, emphasizing data dependence.

🧮 Risks & What to Watch

If upcoming CPI or PCE inflation reports surprise to the upside, this cooling trend could reverse.
Labor market strength/hiring could still push inflation via wage pressure, which the PPI doesn’t fully capture.
Persistent inflation expectations (consumers, businesses) can become self-fulfilling, undermining these soft signals.

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What to Expect from a Potential Fed Rate Cut this week