JPM's Gabriela Santos on Inflation, Tariffs, and Fed Rate Cuts

Inflation Report Analysis

• 💡 The latest inflation report indicates a gradual pass-through of higher tariffs, primarily affecting goods with a high import share.
• ⚠️ This gradual impact has not significantly altered the macro narrative or the market's expectation for Fed rate cuts in September.

Impact on Company Margins

• 📉 Companies with a high import share for their supplies, particularly in consumer staples and consumer discretionary sectors, may face increased pressure on their margins due to less pass-through.
• 🎯 Supermarket and tobacco players are noted as experiencing deflation, which is not beneficial for them.

Market Performance and Strategy

• 📈 The market is showing broad strength, with both blue chips and small caps outperforming, which is unusual given the year's trends.
• 🚫 The strategist advises against leaning into the current small-cap recovery, instead recommending a focus on large caps and sectors linked to a stable economy with gradual rate cuts.
• 🏦 Financials are highlighted as a key sector to watch.

Federal Reserve Rate Cut Expectations

• 📊 The July jobs report provided the Federal Reserve committee with cover to consider resuming rate cuts in September, especially as a risk management strategy against further labor market cooling.
• ⚠️ The market is pricing in a 50 basis point cut in September, but the strategist believes this is unlikely and would require a significantly softer August jobs report.
• 📉 A 50 basis point cut is not seen as positive for equities, particularly for rate-sensitive and cyclical sectors like small caps, as it would likely accompany further economic cooling rather than re-acceleration.