If the economy is so great, why is Wall Street counting on a rate cut?

While President Trump and other Republicans talk up the stock market and the overall economy, Fed chair Jerome Powell was telling Congress that Trump-caused trade tensions and a generally soft economy had made things a bit shaky in Spring.

Business confidence surveys turned "quite negative" in May -- when Trump's trade negotiations with China collapsed amid bitter accusations -- and was "a bit of a confidence shock,"[Powell] said.

That concern among manufacturers, in particular the threat to their global supply chains, prompted the Fed to "indicate at our last meeting we were looking at changing rates."

The Fed open the door last month to cutting the benchmark lending rate, and economists and investors are convinced it will happen at the end of July.

Powell confirmed that the Fed is considering adjusting its stance to help the economy continue to grow.

"The bottom line is the economy is in a very good place and we want to use our tools to keep it there. It's very important this expansion continue as long as possible," Powell said.

Which is why Wall Streeters are propelling (part of) the stock market to new highs. It’s not because of any kind of economic strength, but instead they’re assuming the cocaine party of borrowing and easy money will be kicked up soon.

Market participants took Powell’s comments to be unmistakably dovish, and adjusted expectations for lower interest rates according. Each of the three major domestic stock indices rose to new record intraday highs on Wednesday, and the S&P 500 hit new records again on Thursday. Short-term interest rates stabilized after sharply dropping on Wednesday.

Several Wall Street firms adjusted their expectations for the outcome of the Fed’s July meeting amid Powell’s testimony. As of Wednesday, Goldman Sachs economists placed their odds for a 25 basis point cut at 75%, a 50 basis point cut at 15%, and unchanged policy at 10%. Morgan Stanley and UBS economists each said their base case calls were for the Fed to cut interest rates by a more aggressive 50 basis points.

Fed fund futures priced in a 76.5% probability for a 25 basis point cut as of Thursday afternoon, along with a 23.5% probability of a 50 basis point ease.

Bad news is good news...and Bubblicious.

But another report came out on Thursday which showed that prices were ticking up, which might argue against major rate cuts.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in June on a seasonally adjusted basis, the same increase as in May, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.6 percent before seasonal adjustment.

Increases in the indexes for shelter, apparel, and used cars and trucks more than offset declines in energy indexes to result in the seasonally adjusted all items monthly increase in June. The energy index fell 2.3 percent as all of the major energy component indexes declined.

The food index was unchanged as the index for food away from home rose but the index for food at home declined. The index for all items less food and energy rose 0.3 in June, its largest monthly increase since January 2018. Along with the indexes for shelter, used cars and trucks, and apparel, the indexes for household furnishings and operations, medical care, and motor vehicle insurance were among the indexes that increased in June. The indexes for recreation, airline fares, and personal care all declined in June.

Keep your eyes on that core number, it’s the largest 1-month increase for that stat in 17 months. It includes another increase in shelter, which is up 3.5% over the last 12 months after being up 3.5% in the year before that. Given that oil futures have jumped 17% since early June, and with a hurricane hitting the oil-heavy Louisiana coastline by this weekend, you’re going to see June's lower prices at the pump get notably higher in the coming months.

I’m not saying that inflation will go crazy in the coming months, but prices increasing at a 2.5-3% rate and an allegedly strong economy would not usually be a situation where interest rates would be cut. However, that seems to be what's going to happen by the end of this month, and might continue after that. So things are clearly shakier than Trump and other Republicans claim, and it may not take much for that soft foundation to start sinking.