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On Wednesday, global markets presented a mixed picture, with U.S. index futures wobbling to and fro. This followed Nvidia's (NVDA) remarkable ascent, overtaking Microsoft to claim the title of the most valuable publicly traded company in the United States.

Despite the closure of U.S. equity and bond markets in observance of the Juneteenth holiday, futures trading persisted. Contracts tied to the S&P 500 inched up by less than 0.1% in late-afternoon trading, while Nasdaq-100 futures modestly advanced by 0.2%. Conversely, Dow's industrial future experienced a slight decline.

The sustained fervour surrounding artificial intelligence continues to drive the markets. On Tuesday, the S&P 500 achieved its 31st record close of the year, and the Nasdaq Composite celebrated its 20th all-time high. Central to this uplifting trend was Nvidia, whose shares soared, culminating in a market valuation of an impressive $3.34 trillion, thereby eclipsing Microsoft (MSFT).

This stock market buoyancy has been further reinforced by economic data signalling a cooling U.S. economy. Investors, previously unsettled by the economy's robust performance, which cast doubt on the potential for Federal Reserve interest rate cuts this year, now find renewed optimism in the possibility of such policy measures.

Expectations for interest rate cuts have heightened, driven by recent data. Markets are now pricing 45 basis points of cuts for this year and 140 basis points by the end of next year, based on the December 2025 fed funds futures contract. This anticipated level of easing is the highest since March and should put downward pressure on the U.S. dollar or, at minimum, limit its gains.

The lack of growth in nominal retail sales year-to-date through May is compelling evidence of an economic slowdown. Coupled with decelerating inflation, and if we get a pronounced slowdown in job growth, as indicated by the next Non-Farm Payroll (NFP) data, it would likely prompt the Federal Reserve to cut rates in September.

According to data released on Wednesday, U.S. home builder sentiment has fallen to its lowest level in 2024. The National Association of Home Builders (NAHB) gauge registered a reading of 43, marking the second consecutive month below the threshold separating optimism from pessimism. The primary culprit is clear: high interest rates.

Buyers are highly sensitive to changes in interest rates. As home prices continue to rise, relief can only come from lower rates due to the structural mismatch in supply and demand.

NAHB Chief Economist Robert Dietz described the current situation as "unusual." Elevated shelter inflation is "making it difficult for the Fed to achieve its [inflation] target," he noted on Wednesday. This challenge is preventing the Federal Reserve from cutting rates. However, Dietz argued that "the best way to bring down shelter inflation and push the overall inflation rate down to the 2% range is to increase the nation’s housing supply," which requires "a more favorable interest rate environment for construction and development loans."

The Federal Reserve faces a paradoxical reality: high rates may now contribute to inflation. The challenging yet essential conclusion that contradicts traditional economic orthodoxy is that cutting rates might be the most effective strategy to reduce inflation in the U.S

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