Image: BigstockRecent ADP and jobless claims data seem to support the “soft economy” narrative, which increases market expectations of the Fed cutting interest rates as soon as September of this year. According to the CME FedWatch, the market has priced in a roughly 68.1% likelihood of interest rates falling to 5-5.25%.Investor expectations of a December rate cut prices in a probability of 46.3% for interest rates dropping to 4.75-5%.
More Into the Data
According to Reuters, June saw the unemployment rate remain changed at 4%, with U.S. job growth adopting a healthy pace, indicating that the Fed maybe able to control the persistent inflation levels without increasing the possibility of a recession.The employment report by the Labor Department is anticipated to show that the rate of increase in yearly wages has slowed down to its lowest level in three years, confirming the disinflationary trend after unfavorable inflation data was witnessed in first-quarter 2024. This may help in increasing the confidence of policymakers in regards to cutting interest rates this year.However, even with increasing market expectations of an interest rate cut starting in September, it is important to note that the Fed will maintain a cautious approach throughout the year to avoid being too aggressive.
ETFs to Consider
Below, we highlight a few ETF areas that could see improved performance in the near-term, given the growing likelihood of an interest rate cut by the Fed.
Currency ETFs
The U.S. dollar’s value tends to move inversely with interest rate adjustments by the Fed. Along with the “de-dollarization” trend, the rising probability of the Fed cutting interest rates this year makes the dollar less attractive to foreign investors, resulting in decreased demand for the currency.Investing in funds that offer exposure to currencies relative to the greenback may become an attractive investment option in such a landscape. Investors can consider Invesco DB U.S. Dollar Index Bearish Fund (UDN – Free Report), an appropriate option for investors with a bearish outlook on the U.S. dollar.Investors can also look into funds like Invesco CurrencyShares Euro Currency Trust (FXE – Free Report), Invesco CurrencyShares Swiss Franc Trust FXF, and Invesco CurrencyShares British Pound Sterling Trust (FXB – Free Report).Investing in digital currencies could also be worth considering, given the possibility of a weakening greenback. Therefore, iShares Bitcoin Trust Registered IBIT, Grayscale Bitcoin Trust GBTC, and Bitwise Bitcoin ETF Trust BITB may be worth a look.
Emerging Market ETFs
The greenback’s value tends to move inversely with interest rate adjustments by the Fed. As the Fed’s rate cut prospects rise, the dollar loses appeal to foreign investors, reducing its demand. EMs tend to perform well when the U.S. dollar weakens.The increasing likelihood of the Fed cutting interest rates will also benefit emerging markets heavily reliant on exports, resulting in increased trading activities with the United States.Thus, investors may consider funds like iShares Core MSCI Emerging Markets ETF (IEMG – Free Report), Vanguard FTSE Emerging Markets ETF (VWO – Free Report), iShares MSCI Emerging Markets ETF (EEM – Free Report), and SPDR Portfolio Emerging Markets ETF SPEM.
Gold ETFs
Gold prices are inversely related to the value of the U.S. dollar, as gold is priced in dollars. A weaker U.S. dollar generally leads to higher demand for gold, pushing its price upward as it becomes more affordable for buyers holding other currencies. With increased projections of rate cuts later in 2024, investing in gold may become more attractive.As the U.S. dollar weakens toward the end of 2024 and into 2025, the price of the yellow commodity may surge further. Therefore, SPDR Gold Shares (GLD – Free Report), iShares Gold Trust (IAU – Free Report), abrdn Physical Gold Shares ETF (SGOL – Free Report), and Goldman Sachs Physical Gold ETF AAAU could be considered.
Housing ETFs
With increasing expectations of interest rate cuts toward the end of the year, 2024 appears poised to provide a relief to the housing market. A decline in the Federal funds rate typically has an indirect impact on the mortgage rate. Industry experts are optimistic about mortgage rates trending favorably throughout the year.Thus, funds like iShares U.S. Home Construction ETF (ITB – Free Report), SPDR S&P Homebuilders ETF (XHB – Free Report), Invesco Building & Construction ETF (PKB – Free Report), and Hoya Capital Housing ETF HOMZ may be worth consideration.More By This Author:Should Investors Buy Stock In These Payroll Processers After Friday’s Jobs Report? 3 Balanced Mutual Funds Worth Betting On For Stable Returns3 Consumer Staples Stocks To Buy As Prices Slow Down
