The ‘Fed put’ is back: If Tuesday’s inflation report is bad expect chaos in the markets

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S&P 500 futures were flat this morning as global markets rested at or near their all-time highs. Investors are optimistic the U.S. Federal Reserve will cut rates in September, despite an uptick in inflation, in part because of President Trump’s appointment of Stephen Miran to the Fed. If inflation is 0.3% or less, a rate cut is expected; a higher reading could derail these hopes and cause market turmoil.

S&P 500 futures were flat this morning after the index closed up 0.78% on Friday, a new all-time high. Japan’s Nikkei 225 reached a record peak too, up 1.85% today. Stocks in Europe broadly held their gains in early trading.

Why all the optimism?

Because investors think the U.S. Federal Reserve will almost definitely cut interest rates in September, and they are hoping that the consumer price inflation report—due tomorrow—won’t show a significant rise in inflation.

The “Fed put” is in full effect, according to JPMorgan: “We expect moderate weakening in the macro data but enough to trigger a prompt Fed response” in September, according to Fabio Bassi and his colleagues.

Analyst consensus is that inflation will tick up 0.3% to 3%, according to ING, a small enough rise that the Fed will be able to ignore it in favor of cutting rates. The weak jobs report on August 1 was such a surprise that the central bank is now expected to ignore a small amount of inflation in favor of supporting the economy with a new dose of cheaper money.

“Tomorrow’s US CPI report … could prove to be one of the larger events of the summer for markets,” Jim Reid and his team at Deutsche Bank told clients this morning.

If CPI goes up by 0.3% or less, “that is a number that can probably be seen as acceptable for the Federal Reserve to proceed with a September cut (90% priced in), given the backdrop of a significantly weaker jobs market,” ING’s Frantisek Taborsky and Francesco Pesole said in a note this morning.

There’s one other reason investors are so confident that cut is coming next month: President Trump added Stephen Miran as a temporary Fed governor. They view him as having a single mission, to persuade the Federal Open Markets Committee to lower rates and weaken the dollar.

“Stephen Miran drew headlines earlier this year for proposing a ‘Mar-a-Lago Accord’ to weaken the dollar and boost US exports. While the administration hasn’t formally embraced the idea, his appointment signals clear discomfort with dollar strength,” Convera’s George Vessey said in an email this morning. “Miran’s stance firmly aligns with the dovish camp.”

Of course, the reverse is true, too. If that inflation report comes in higher than expectations tomorrow, then the prospect of a September cut could disappear, which will likely cause some drama and selling tomorrow morning.

Here’s a snapshot of the action prior to the opening bell in New York:

S&P 500 futures were flat this morning, premarket, after the index closed up 0.78% on Friday.
STOXX Europe 600 was flat in early trading.
The U.K.’s FTSE 100 was up 0.25% in early trading.
Japan’s Nikkei 225 was up 1.85%, hitting a new all-time high.
China’s CSI 300 was up 0.43%.
The South Korea KOSPI was down 0.1%.
India’s Nifty 50 was up 0.69%.
Bitcoin rose to $121.6K.