Last Thursday brought us bad news for inflation but good news for the economy…
And by that, I mean inflation appears to be on the losing side of this war.
So what happened?
The latest Consumer Price Index (CPI) data came out and I’ll break it down for you.
By the way, these were June numbers, since the data is always released the following month.
So In June 2024, Core CPI (which excludes volatile food and energy prices) rose by 0.1% from May and year-over-year the same metric rose 3.3%.
Okay, that means nothing without some context…
The 0.1% increase is the smallest we’ve had in three years…
And the year-over-year increase represents a continuous decline in the price of goods.
Below is a chart to better explain what I’m talking about.
Here’s a deeper diver into the price movements year-over-year of the various CPI components. Note that this includes the energy and food sectors so it’s I’m talking about the entire CPI, not Core.
Energy Sector:
- Gas prices fell by 2.5%.
- Energy services, including electricity, rose by 4.3%.
Food Sector:
- Food at home saw a modest increase of 1.1%.
- Food away from home jumped by 4.1%, highlighting the rising costs in dining out.
Shelter and Services:
- Shelter costs, a significant part of the CPI, increased by 5.2%.
- Medical care services saw a 3.3% rise, while hospital services surged by 6.9%.
Transportation Services:
- This category increased by 9.4%; motor vehicle maintenance and repair costs rose by 6.0% and car insurance skyrocketed by 19.5%.
What’s really important with all this data is that it further confirms to the Federal Reserve that we’re closing in on inflation and it boosts the odds that we’ll get a rate cut later this year.
To learn more about the Fed and interest rates, read my article here.
The Fed is always tight-lipped about what they’re planning to do since whatever comes out of their mouths can make the financial markets go insane.
But, the sentiment is good.
The good CPI data from last week really helps our chances of getting an interest rate cut in September.
So how will lower interest rates impact the trading landscape?
Table of Contents
How do lower rates affect stocks?
Increased Corporate Profits: Lower borrowing costs mean companies can finance projects and expansion at cheaper rates. This can lead to higher profits, driving up stock prices. Technology and consumer goods companies which often rely on financing for growth, usually benefit the most from this.
Shift to Equities: Lower interest rates make bonds and other fixed-income investments less attractive due to lower yields so investors switch over to stock. More money in the stocks increases stock market returns.
How do lower rates affect different sectors?
Financial Sector: Lower rates often compress net interest margins for banks, potentially lowering their profits. However, increased loan volumes can offset some of these impacts.
Real Estate: Lower interest rates reduce mortgage costs and grow the demand for housing. This benefits real estate stocks. Real Estate Investment Trusts (REITs) can see increased investment as investors seek higher yields than those available from bonds.
Consumer Discretionary: With cheaper credit, consumers are more likely to spend on non-essential goods and services. For example, families might dine out more, or people might buy more luxury goods than they normally would. This boosts companies in the consumer discretionary sector, from automakers to retailers.
Many of these sectors lend themselves well to swing trading.
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It’s the sweet spot between fast-paced day trading and long-term buy-and hold investing.
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Forex and Lower Interest Rates
In the foreign exchange market, lower interest rates can lead to a weaker currency as investors turn to other currencies with higher returns. This depreciation can make a country’s exports more competitive, benefiting companies with significant international sales.
For example, non-U.S. revenues already represent more than half of Apple Inc.’s (NASDAQ: AAPL) top line. For consumers outside the U.S., a weaker dollar makes AAPL’s products more attractive and this means higher growth in that segment.
What about commodities?
Lower interest rates can lead to higher commodity prices. Commodities like gold often benefit because they become more attractive as a store of value when yields on bonds are low.
Prices of oil and other raw materials increase from the boost in industrial activity and demand.
Strategies for traders:
Focus on Growth Stocks: Growth stocks, especially in sectors like technology and consumer discretionary, tend to outperform in low interest rate environments. These companies benefit the most from cheaper borrowing costs and increased consumer spending.
Diversify into Real Estate and REITs: With lower mortgage rates driving housing demand, real estate and REITs become attractive investments. They can provide higher yields compared to traditional bonds in a low-rate environment.
Monitor Forex Movements: Pay attention to currency trends. A weaker domestic currency can boost exporters and companies with significant international operations.
Consider Commodity Investments: Look at commodities like gold and oil, which can benefit from lower interest rates and increased economic activity. These assets often serve as a hedge against inflation and currency depreciation.
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My final thoughts:
Traders can find opportunities galore across various asset classes in a lower interest rate environment.
If you understand the ripple effects of monetary policy, you can adjust your strategies to take advantage of lower borrowing costs, increased consumer spending, and shifts in investment flows.
Get ready, lower rates could be here before you know it!
Have a great day everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade