#01: The Cut That Wasn't
Markets walked into July priced for a cut and walked out repricing the whole curve: what the hot inflation print means for equity multiples, and where our conviction scores rotated.
DC Economics
For most of June, a July rate cut was treated as a formality. Fed funds futures put the odds above 80% going into last week, the 2-year Treasury yield had drifted down to 3.58%, and long-duration growth names had outperformed the broader S&P 500 by nearly four percentage points over the month. All of it rested on a single assumption: that core inflation would keep grinding lower.
It didn't. Tuesday's core CPI print landed at 0.4% month-on-month against a 0.3% consensus, lifting the annual rate to 3.1% from 2.9%. Within an hour, the market-implied probability of a July cut had collapsed to roughly one in five. By Thursday's holiday-shortened close, the 2-year yield stood at 3.86%, up 28 basis points on the week, its largest weekly rise since January.
Equities did what equities do when the discount rate lurches higher. The S&P 500 fell 1.6% to 6,358, the Nasdaq 100 dropped 2.4%, and the most expensive decile of the index, names trading above 12x forward sales, lagged by more than 300 basis points. Beneath the surface, though, the rotation was unusually clean: quality and low leverage in, speculative duration out.