CPI is moderate but PPI “explodes”! Will interest rates be cut again in September?

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PPI data is unlikely to derail the pace of rate cuts! The stock price of financial credit dark horse Sezzle has already doubled, and this sector may be poised for a moment in the spotlight?

In Pre-Market Trading on Thursday, a PPI inflation report that far exceeded expectations doused the hopes of investors anticipating a significant interest rate cut by the Federal Reserve.

However, despite the PPI data far exceeding expectations, traders have fully priced in a 25-basis-point interest rate cut at the Federal Reserve's September meeting. The CME Group's FedWatch Tool shows thattraders currently expect a near 95% probability of an interest rate cut at the Federal Reserve's September meeting.

U.S. Treasury Secretary Janet Yellen also publicly stated: "The U.S. may see a series of interest rate cuts starting from now, beginning with a 50-basis-point cut in September."

Ulrike Hoffmann-Burchardi, Chief Investment Officer for the Americas and Global Head of Stocks at UBS Group, expects the Federal Reserve to cut interest rates by 25 basis points at each meeting from September through January, totaling 100 basis points.

Rick Rieder, Blackrock’s Global Chief Investment Officer of Fixed Income, who is on the shortlist for the next Federal Reserve Chair, wrote in a note to clients on Tuesday that the latest economic data supports a more aggressive easing policy. Rieder also believes there is a case for a 50-basis-point interest rate cut in September.

Looking ahead to September, the most significant market event will undoubtedly be the Federal Reserve's interest rate cut!What is the market logic behind this round of interest rate cuts? Which assets are likely to surge first and become the top choices for investors?This article will provide a comprehensive analysis of the market logic behind the Federal Reserve's interest rate cuts for mooers, and explore related investment opportunities.

What is the market logic behind this round of interest rate cuts?

From September to December 2024, the Federal Reserve cut interest rates three times consecutively, with a cumulative decrease of 100 basis points. However, since the beginning of this year, the process of interest rate cuts has been paused, reflecting the current dilemma faced by the Federal Reserve: whether to prioritize preventing an economic recession or preventing inflation from rebounding.

According to the First Financial News, Guangkai Chief Industry Research Institute believes that in the first half of this year, the atmosphere among the hawks at the Federal Reserve was quite strong. Since July, the situation has changed significantly. At the interest rate meeting held at the end of July, Federal Reserve Governors Michelle Bowman and Christopher Waller clearly cast dissenting votes, marking the first time since 1993 that two Federal Reserve governors simultaneously voted against the decision.

Given that the internal concerns about inflation rebounding have not been eliminated, even if the Federal Reserve initiates the second phase of interest rate cuts in September this year, it will still be precautionary, and may manifest in the following ways:First, the initial interest rate cut is likely to be 25 basis points. Second, there may be 2-3 interest rate cuts within the year, with a cumulative reduction of 50-75 basis points. Third, the interest rate cut cycle could extend until 2026.

The bank also stated that monetary policy is flexible and adaptable. When there are significant changes in inflation, employment, growth, and the market, especially if the lagged effects of tariffs begin to fully manifest starting in the fourth quarter of this year, monetary policy will be adjusted rapidly in the short term, and if necessary, it will change direction without hesitation. At this point, the process of interest rate cuts could either be immediately terminated or significantly accelerated.

Which assets are likely to surge first after the interest rate cuts, becoming the preferred choice for winners?

Historical Data indicates that, although interest rate cuts narrow the net interest margins of Banks and Financial Institutions, their impact is far from limited to this. In fact, the core effect of interest rate cuts is to significantly boost loan demand, thereby providing strong support for the Financial Sector.

Firstly, interest rate cuts notably reduce the cost of funds, directly stimulating the borrowing willingness of both enterprises and individuals.Especially in the early stages of economic recovery, there is a robust financing demand in expanding Industries and start-up companies to support Business growth. The decline in borrowing costs creates favorable financing conditions, driving the expansion of lending Business by Financial Institutions. Among these, Fintech companies, with their efficient service models, can respond more quickly to such demands, highlighting their competitive advantages.

Secondly, as the economy warms up, consumer credit demand also increases.During interest rate cut cycles, innovative credit models like 'Buy Now, Pay Later' (BNPL) are particularly favored. This model, by lowering the threshold for consumption and offering installment payment options, effectively stimulates consumption potential. The downward trend in interest rates further reduces the cost of installment financing, significantly enhancing the popularity and appeal of such products.

Therefore, as the Federal Reserve prepares to cut interest rates, financial credit Stocks are expected to see opportunities. Futubull has compiled a list of relevant companies in the U.S. market for mooers' reference:

Among them, payment infrastructure includes Marqeta; payment systems include $Visa (V.US)$ 、 $MasterCard (MA.US)$ Digital payment platforms include $PayPal (PYPL.US)$ 、 $Block (XYZ.US)$ Buy Now, Pay Later (BNPL) companies include $Affirm Holdings (AFRM.US)$ 、 $Sezzle (SEZL.US)$ Consumer credit companies include $Upstart (UPST.US)$ 、 $SoFi Technologies (SOFI.US)$ 、 $OppFi (OPFI.US)$ 、 $Rocket (RKT.US)$ 、 $LendingClub (LC.US)$ 、 $Pagaya Technologies (PGY.US)$ 。

Currently, the market is closely watching buy-now-pay-later (BNPL) companies such as Affirm Holdings and Sezzle; in the consumer credit sector, companies like Upstart, SoFi Technologies, OppFi, and Pagaya Technologies are under scrutiny; Rocket, the largest real estate mortgage company in the U.S., has also been highly sought after recently. Specifically,

Sezzle, the BNPL Dark Horse

$Sezzle (SEZL.US)$ has been a major dark horse in the financial payments sector of the U.S. stock market this year, with its stock price surging by nearly 300% at one point. However, due to lower-than-expected earnings guidance, the stock fell by more than 30% post-earnings.

Founded in 2016, Sezzle specializes in "buy now, pay later" (BNPL) services, Aimed at facilitating fast, secure, and convenient transactions between end customers and retailers, its product is a short-term interest-free installment payment plan that provides end customers with additional budgeting and financing options.

As a consumer billing installment platform available for both buyers and sellers to choose from, Sezzle offers its services to consumers and merchants.

1. For Consumers

Sezzle provides an installment payment plan for consumers. When shopping on the Sezzle platform, consumers can choose to pay 25% of the bill amount upfront, with the remaining 75% paid in bi-weekly installments until the full amount is settled. As long as the payments are made on time within six weeks, this installment service is completely interest-free and incurs no additional fees.

It primarily offers a "four interest-free installments" service, charging no interest to users and generating revenue mainly through merchant fees.If a consumer misses a payment, a small late fee will be charged.

Overall, Sezzle targets younger users with shorter credit histories, who prefer small, frequent transactions.Its customers prioritize flexible payment options and low barriers to entry over higher loan amounts.Sezzle offers shorter repayment periods, leading to high user retention but lower average transaction values.

This also means the company takes on much less risk compared to credit card issuers or long-term lenders like Klarna or Affirm.

2. For Merchants

Data from Sezzle's website shows that its BNPL system can achieve higher average order values and higher customer conversion rates on the shopping websites of various business partners. Additionally,Sezzle assumes all risks related to end-customer fraud and default, and sellers receive the full amount when the buyer makes the first installment payment.

Specifically, the company's business model revolves around BNPL (Buy Now, Pay Later), with primary revenue sources including transaction fees, subscription services, and merchant fees. Core products includeOn-Demand Services(Instant installment payments, serving as an entry point to guide users towards subscription products);Premium and Anywhere Subscriptions(Offering premium features such as using a virtual card at any store (compatible with Apple Pay and Google Pay) and including price comparison, deal finding, and rewards);Pay Later Anywhere(Supporting shopping at thousands of stores, including Amazon, Target, and Walmart).

In the second quarter, Monthly Order and Subscription Users (MODS) climbed to 748,000, showing significant growth both sequentially and year-over-year. The average number of transactions per user per quarter increased to 6.1, up from 4.8 in the same period last year, indicating enhanced user activity.

Buy Now, Pay Later Market Leader — Affirm Holdings

$Affirm Holdings (AFRM.US)$ Founded in 2012, Affirm is a financial technology company headquartered in San Francisco, USA, which went public in 2012. Its main Business is to provide 'buy now, pay later' payment options through partnerships with merchants, often referred to as the American version of 'Huabei' in China. The company's stock has risen nearly 25% this year.

Affirm primarily operates in North American countries, mainly the United States and Canada, with over 98% of its revenue coming from the United States.The company's Business extends beyond interest-free or low-interest installment payment models (BNPL) to cover various personal financial services such as savings and debit cards.The company's innovative BNPL payment method, based on trust and transparency, has significantly improved the payment experience for consumers, thereby attracting a large number of users. Additionally,in 2020, the company launched a one-stop app that includes marketplace, payment, and repayment functions,and is committed to developing it into a new generation of payment platforms focused on e-commerce and mobile business models.

Affirm has two main sources of income:network fees and interest income.From both partners and users.

Network Revenue:The company's Buy Now, Pay Later (BNPL) payment and virtual card services bring more high-quality customers to partner merchants and stimulate potential consumer demand, while the company charges a commission on orders paid through this payment method.

Differing from the profit model of traditional credit card companies, the company has forgone a portion of interest income to attract users with a transparent repayment mechanism. To increase network fee revenue, the company has secured partnerships with a large number of high-quality retailers willing to pay relatively higher commissions. In 2021, the company also launched a debit card business.

Interest Income:When providing long-term or relatively large loan products to users, the company charges interest fees.

The essence of the company's loan products is based on a trust and transparency-driven repayment mechanism, which inevitably impacts interest income. The company drives the growth of interest income by expanding the variety and diversification of its product offerings.

Overall, Affirm primarily targets middle to high-income users, offering large installment services to help them avoid credit card debt.Partner merchants are mostly national large brands with high average transaction values, making it particularly suitable for purchasing high-value items such as electronics, fitness equipment, and air tickets.

Upstart — AI Lending Platform

$Upstart (UPST.US)$ Founded in 2012, the company provides high-quality credit products based on its own artificial intelligence models and cloud applications.

Upstart's core product is personal loans, primarily used for weddings, home renovations, medical loans, and other purposes, with loan amounts ranging from $1,000 to $50,000. The annual interest rate ranges from approximately 6.7% to 35.99%, with terms between 3 to 5 years. In addition to personal loan services, Upstart also offers auto loans and home equity lines of credit (HELOC).

The company's revenue is mainly composed of referral fees, platform fees, and service fees. According to the company's communication data, the proportion of fully automated loans has reached 91%, demonstrating the high availability of its AI model.Morgan Stanley has raised the target price for the company to $70, but also warns investors that the company's valuation indicators, such as the PE, are already near historical highs, reflecting high growth expectations from investors. Further upside potential should be carefully evaluated.

Pagaya, an AI loan platform, operates a unique B2B2C fintech platform that uses AI to underwrite consumer credit on a large scale.

Unlike traditional lending institutions, Pagaya neither issues loans nor holds a significant amount of long-term loans.

$Pagaya Technologies (PGY.US)$ Pagaya, an AI loan platform, operates a unique B2B2C fintech platform that uses AI to underwrite consumer credit on a large scale.

Unlike traditional lending institutions, Pagaya neither issues loans nor holds a significant amount of long-term loans.Pagaya, an AI loan platform, operates a unique B2B2C fintech platform that uses AI to underwrite consumer credit on a large scale.itsThe core business involves using proprietary AI models to assess credit applications, enabling seamless loan disbursement through bank partners, and generating revenue from fees linked to underwriting and capital markets activities.

In simple terms, Pagaya adopts a 'pre-issued ABS' model: it pre-issues asset-backed securities (ABS) to institutional investors to raise funds. When traditional lending institutions (such as banks) encounter applicants with insufficient FICO credit scores, they refer these applicants to Pagaya's AI system for a secondary credit assessment. If the assessment is favorable, Pagaya uses the pre-raised funds to directly issue the loans. These loans are then bundled into new ABS, with 95% sold to institutional investors and 5% retained by Pagaya (to meet regulatory requirements).

This light-asset, fee-driven, data-centric model positions Pagaya as a 'technology-first enabler' in the lending ecosystem. It combines AI-driven underwriting with capital market structures, serving a dual client base: (1) lending institutions seeking better loan decision-making, and (2) institutional investors seeking yield-oriented consumer credit exposure.

This approach allows Pagaya to expand efficiently without taking on excessive balance sheet risk or dependence on interest income, thereby reducing the volatility of its revenue during credit cycles.

This company is a typical rate-cycle-sensitive firm, and under this year's expectations of interest rate cuts, the stock has risen more than 256%.

However, despite working with established and stable partners, some of its ABS loans targeting lower-quality borrowers may still carry risks.

Comprehensive financial platform — SoFi

$SoFi Technologies (SOFI.US)$ As a leading fintech company, it has continuously disrupted traditional financial service models since its establishment in 2011.The company's stock has risen nearly 60% this year.

SoFi initially focused on student loan refinancing and has since evolved into a one-stop platform providing a full range of digital financial services, including lending, financial services, and technology platforms.It covers three core businesses: lending, financial services, and technology platforms.SoFi also holds a banking license, allowing it to accept deposits and issue loans, combining the advantages of traditional banks and FinTech.

Notably, SoFi has been actively entering the crypto space this year, planning to relaunch cryptocurrency investments on its platform and introduce a global remittance function, facilitating cross-border transfers via blockchain processes.

Additionally, SoFi has not missed out on the recent trend of private equity in OpenAI. It is collaborating with asset management companies to launch new private market funds, allowing retail investors to invest in companies such as SpaceX, OpenAI, and Epic Games.

AI Credit Company — OppFi

$OppFi (OPFI.US)$is a company that leverages an AI-driven technology platform to provide credit services to middle-income individuals. Its core target customers are consumer cohorts not adequately served by traditional banking services.

OppFi collaborates with community banks through its online platforms (such as OppLoans, SalaryTap, and OppFi Card),offering short-term, high-interest loans to low-income groups in the United States with annual incomes ranging from $30,000 to $100,000.The company uses AI and data analytics to optimize credit assessment and risk management.

Its flagship product, OppLoans, provides short-term installment loans of $1,000 to $1,500, with a term of approximately 11 months.This service is designed for middle-class customers who have bank accounts but lack sufficient credit scores to obtain traditional loans. With automated approval technology, OppLoans offers fast and convenient financing, with its auto-approval rate increasing from 72% in 2023 to 77% in 2024.

This company's stock price has more than doubled this year, and although it has recently declined, the year-to-date gain is still as high as 40%.

Rocket, the largest Real Estate mortgage lending company in the United States,

$Rocket (RKT.US)$is the largest Real Estate mortgage brokerage company in the United States.Its subsidiaries include Rocket Mortgage by Quicken Loans, Rocket Homes, Rocket Loans, Rocket HQ, and others. The company has risen by nearly 83% this year, primarily due to the Bullish expectations for the Real Estate and credit sectors, of which the company is a beneficiary.

The companyis the world's first fully online mortgage company,with loan approvals taking only 8 minutes.

Since its inception, Rocket has completely reshaped the mortgage Industry through two major innovations, establishing its leadership position.

1996: The revolutionary 'Mortgage In A Box' was launched, allowing customers to fill out and return mortgage applications from the comfort of their homes. Just two months later, the company achieved a significant milestone by disbursing $35 million in loans.

1999: To fully embrace digitalization, Rocket sold all 28 of its physical branches and launched the rockloans.com platform.

2015: Rocket Mortgage, the world's first fully online mortgage platform, was introduced.This technology is now used in 98% of the company's home loan disbursements.

Today, Rocket is once again leading industry transformation,by building an end-to-end, AI-driven loan approval system aimed at reducing human intervention and significantly enhancing efficiency.

Overall, these companies are still heavily influenced by the macroeconomic environment. If investors believe that an interest rate cut cycle is on the horizon, these companies present attractive investment opportunities. However, if inflationary pressures resurface and push rates higher, the demand for consumer loans may decline, and funding costs will rise rapidly. This not only dampens the willingness of both borrowers and lenders but also increases the difficulty for these companies to secure funding for loans, thereby weakening their business volumes.

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