Citi sees Fed on track for September rate cut after softer inflation data

Investing.com - As markets digest the latest inflation data, the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) is trading at $45.39, with average daily volume of 4.7 million shares, reflecting current market sentiment. Citi analysts believe the Federal Reserve remains on course to resume interest rate cuts in September following the latest inflation report, which marked the fourth consecutive softer monthly reading.

The bank notes that while core PCE tracking indicates a stronger 0.32% month-over-month reading, this reflects "temporary strength in dental services and a rebound in portfolio management fees" that should not concern Fed officials after three sub-target monthly annualized readings. According to InvestingPro data, VXX has seen a -2.09% return over the past week, suggesting markets are maintaining relatively calm despite the PCE data.

Citi observed that prices for home furnishings increased the most in any month since January 2022, suggesting some tariff costs are being passed through in certain goods categories, with the possibility that "different categories of goods see staggered price increases, with apparel prices rising later this summer."

The analysis indicates that "tariff related inflation will be relatively modest and confined to goods as services prices continue to slow," with services inflation looking "favorable for a return to mandate-consistent inflation."

Citi highlighted that owner’s equivalent rent and primary rents are rising at pre-pandemic normal rates, with potential for "even further slowing" as house prices fall, while noting that despite some volatility in categories like airfares, "the slowdown in non-shelter core services prices is broad across categories." With VXX trading 50% below its 52-week high of $91.19, InvestingPro subscribers can access additional insights and metrics to better navigate market volatility expectations. InvestingPro offers 6 more key tips about VXX’s performance and outlook.

In other recent news, Truist Securities has adjusted its investment strategy by downgrading equities from a "neutral" rating to "less attractive," while upgrading cash to "attractive." This shift follows a notable market rally and reflects a more cautious approach. Meanwhile, Citi analysts reported a decline in the University of Michigan Sentiment index, which measures consumer confidence, dropping to 50.8 from 52.2. Citi noted that the index may not fully account for recent tariff changes, and the impact on consumer spending remains uncertain.

Additionally, JPMorgan has revised its global economic forecasts, now projecting lower recession risks due to reduced tariffs between the United States and China. The firm highlighted the decreased probability of a U.S. recession, though it cautioned that trade tensions could resurface. In trade-related developments, a federal trade court invalidated certain tariffs imposed by President Trump, leading to an appeal by the administration. Citi analysts discussed potential avenues for reimposing tariffs, despite the current legal setback. These recent developments highlight the dynamic nature of the current economic and investment landscape.

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