The Federal Reserve has kept interest rates at record-high levels for quite some time, citing additional progress in price pressures ebbing toward the central bank’s target of 2%. However, July’s doomed jobs data raised recession fearmongering and compelled market participants to believe that the Fed has been a bit late in slashing interest rates.

Nevertheless, cooling consumer and wholesale prices last month strengthened hopes that the Fed would initiate an interest rate cut in September, even if it won’t be supersized. Despite rising shelter costs, unchanged energy prices and a fall in new and used car prices helped broader inflationary pressure retreat in July.

The US Bureau of Labor Statistics noted that the consumer price index (CPI) increased 2.9% year over year in July, less than June’s 12-month inflation rate of 3%, and the annual rate is also the lowest reading since March 2021. The yearly rate of the core CPI that eliminates the unpredictable fuel and food prices increased 3.2% last month, the lowest reading since April 2021.

Similarly, the producer price index (PPI) increased 2.2% year over year in July, marking a significant drop from June’s yearly rate of 2.7%. Prices of goods and raw materials have fallen substantially from the big spike in 2021 and 2022. 

The PPI figure is important since it directly impacts the Fed’s preferred gauge, the personal consumption expenditures (PCE) index. The PCE index increased 2.5% year over year in June, less than May’s yearly rise of 2.6%, added the Bureau of Economic Analysis. Have a look at the table:

Thus, moderating inflation has assured investors of a quarter-point interest rate cut, if not a half-point reduction in the Fed’s policy meeting next month. Almost 63.5% of traders expect the Fed to trim interest rates by 25 basis points, versus 45% one week ago, per the CME FedWatch Tool. Many of them also believe that there will be a minimum of two interest rate cuts this year.

Rate Cuts Are a Blessing for Homebuilders

Mortgage rates tend to fall amid interest rate cuts. This increases the demand for houses, which boosts the profit margins of homebuilders such as PulteGroup, Inc. (PHM Quick QuotePHM - Free Report) . 

At the same time, homebuilders’ input costs get reduced when interest rates are trimmed. Mortgage rates are 6.59% this week, the lowest since May 2023, per Bankrate’s latest survey (read more: Plunge in Mortgage Rates Are a Boon for PHM, KBH, MHO).

The Zacks Consensus Estimate for PHM’s current-year earnings has increased nearly 4% over the past 60 days. The company’s expected earnings growth rate for the current year is almost 14%. PHM currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Tech Stocks Thrive in a Low Interest Rate Scenario

Interest rate cuts are a boon for semiconductor memory solutions provider Micron Technology, Inc. (MU Quick QuoteMU - Free Report) since lower borrowing costs would uplift the company’s profit margins and its cash flows won’t be affected, further leading to investments in research and development.

The Zacks Consensus Estimate for MU’s current-year earnings has increased 26.1% over the past 60 days. The company’s expected earnings growth rate for the current year is 126.1%. MU currently has a Zacks Rank #2.

Rate Cuts Work Wonders for Utility Players

Utility stock, Atmos Energy Corporation (ATO Quick QuoteATO - Free Report) engages in natural gas distribution business in the United States. Interest rate cuts would reduce Atmos Energy’s debt level, help the company pay off dues, and boost profitability.

The Zacks Consensus Estimate for ATO’s current-year earnings has increased 0.9% over the past 60 days. The company’s expected earnings growth rate for the current year is 11.3%. ATO presently has a Zacks Rank #2.

Shares of PulteGroup, Micron Technology, and Atmos Energy have gained 19.2%, 9.1%, and 10.5%, respectively, year to date.

Image Source: Zacks Investment Research