Weekend Update, September 23rd, 2024
Index, Sector & Asset Performance
The Fed cut shorter term interest rates 50 bps on Wednesday, opting for a larger rate cut than many had expected. As we have previously discussed, the move was focused on the labor markets, where the FOMC noted “job gains have slowed” (previously discussed, overstated for 10-12 months +) and promoted their “greater confidence that inflation is moving, towards 2%”.
Most major US equity markets made new all-time highs last week with the S&P 500 gaining +1.4%. The broad moves higher were supported by the Federal Reserve’s 50 basis point (.50%) funds interest rate cut, surprising many financial commentators into an illiquid market and quad witching option expiration week Friday. Signs of economic resilience in domestic retail sales kept the “soft-landing” trade alive for another month. Cyclicals and tech stocks led while defensives like staples lagged the broad markets. Lagging small cap indexes benefitted most from the Fed “going big”, with the Russell 2000 rising +2.1%.
Treasury bond prices, having already front-run the Fed actions and rallied in their normal manner, weakened last week, leading to higher yields with the 10-year yield up +9 bps and the 2-year rate, the closest to Fed actions closed flattish on the week. These moves reflected stronger economic data (normal for September-October) but also the FOMC’s, (horribly unpredictive) “dot plot” showing cuts for the rest of 2024. Corporate credit spreads continued to tighten last week as the odds of a soft landing improved on the Fed’s aggressive action. Markets continue to anticipate more interest rate cuts than the Fed’s predictions, having almost 3 rate cuts by end 2024, and another 125 bps of cuts in 2025, vs 100 in the dot plot.
Economic Indicators and Earnings Commentary
The verbal rhetoric from the Fed will ramp up this week post September’s meeting blackout window opening. No less than ten FOMC members will speak this week, including Chair Powell on Thursday and Governor Bowman who was the first governor to dissent at an FOMC meeting in almost 20 years.
This week’s key economic report is on Friday with personal spending expected to rise 0.3% in August after a larger gain in July. PCE prices likely slowed again to a 0.1% advance in the month. The Fed will have its eye on the shorter-term metrics, with Governor Waller suggesting that the four-month annualized rate could fall to 1.8% in August given his estimate of a 0.14% monthly increase.
This would put core inflation below the Fed’s target. Durable goods orders will be released on Thursday, which look to fall -2.6% in August on volatile aircraft orders. The smoother capital goods component should hold steady after slipping in July.
Global Market Trends/Commodities/Currencies
Oil prices rose into the low $70s. The oil market remains in backwardation, signaling a healthy supply/demand balance. However, the difference between spot prices and futures one year out has narrowed to $4 from $8 early this summer.
Gold reacted positively to the Fed’s rate cut, blowing past $2,600/oz for a fresh record, while industrial metals welcomed the easier policy stance rallying and shrugging off more weak data out of China.
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