Big Picture Quick Take - sentiment is bullish, VIX falls. Central banks to the rescue. RBNZ cuts. Is the Fed next?

US markets got a boost ahead of the US CPI release overnight after former Fed hawk Raphael Bostic changed his stance, doing a backflip after seeing PPI rise less than expected, and now supporting a Fed rate cut by the end of 2024.

US stock market psychology and sentiment improved after US Producer Prices (PPI) rose less than expected. This is important as some components (healthcare, financial services, airfares) go into the Fed's preferred inflation gauge—PCE. Still, the focus will be on the US CPI for July, released tonight, and whether it rises in line with expectations (+0.2%). Tonight's print could also show the smallest three-month gain in core prices since early 2021.

As we stand now, five Fed rate cuts are fully priced in, so it could be disappointing if tonight's CPI does not behave.

Storm clouds are brewing, and central banks are now acting. NZ's central bank, the RBNZ, cut interest rates by 0.25% to 5.25%, starting its rate-cutting cycle sooner than previously indicated as they see GDP falling by 0.5% in the second quarter, with a drop expected in the third quarter as well. They also expect employment to rise and output to fall. With the outlook being uncertain, they are seeing outward migration pick up, vehicle traffic decline, and credit card transactions fall—signs that the average consumer is in pain.

The RBNZ also sees its CPI getting back to its target by the September quarter but expects the cash rate to fall by 101 basis points by mid-2025. Now, RBNZ futures see the RBNZ cutting rates in September and November, and again in February and April 2025. The takeaway here is that the storm clouds of uncertainty are getting thicker, so we could see other central banks follow (excluding Australia—which is in a league of its own).