Hey folks, the Federal Reserve clearly sent a signal to the markets they are “all in” on keeping the markets on a path towards a soft landing. Get my take on the current market action and my thoughts on where we go from here.
MARKET SOUND BITES:
Markets moved to record highs as investors celebrated the kickoff to what many expect to be a prolonged Fed rate-cutting cycle. The rally was also relatively broad, with the smaller-cap indexes outperforming. The event dominating sentiment during the week appeared to be the Fed’s rate announcement following its policy meeting on Wednesday. The initial reaction to the Fed’s decision to “go bigger” and cut rates by 50 bps—the first cut of any size since March 2020—was relatively muted (taking the current Fed Fund rate down to 4.75% – 5%), with the S&P 500 Index falling slightly to end the day. Investors’ celebration of the news seemed to begin on Thursday morning, with the Dow, the S&P and Nasdaq all surging to new highs. Over the past 20 years the FEDs have only gone for a more than 25 bps adjustment 12 times and all of those were in supersize market moves during the 2008-09 financial crisis and the COVID pandemic. To me this 50 bps move read “fear” more than their words that “everything is fine”. Many analysts are now coming forward saying the next 10-20 years of US Index performance will be much less than the ’08-09 bear market with annual averages around 8%.
The week’s economic data arguably had an upbeat overall tone where we saw retail sales rising 0.1%, which was more than expected and it also followed an upwardly revised jump of 1.1% in July. More evidence that consumers remained in good shape arrived Thursday in the form of a downside surprise in weekly jobless claims. Continuing claims also fell to their lowest level in three months. In addition, investors seemed encouraged by some signs of life in the troubled housing sector. The Commerce Department reported on Wednesday that building permits rose 4.9% in August, their biggest monthly gain in a year and taking them back to their highest level since March.
The yield on the benchmark 10-year U.S. Treasury note rose—but not dramatically—in the wake of the Fed’s decision on Wednesday, touching its highest intraday level since September 5. Keep in mind that the average FED rate is 4.6% going back to 1954. The current Fed Dot plot suggests 50 bps cuts in their last 2 meetings this year and 100 bps cuts to end 2025 with a Fed Fund Rate of 3.25% – 3.50%.
In the UK we saw the Bank of England (BoE), as expected, held its key policy rate at 5.0%, with the Monetary Policy Committee voting 8–1 in favor of no change. Governor Andrew Bailey stressed, “It is vital that inflation stays low, so we need to be careful not to cut too fast or by too much.” Meanwhile, recent comments from hawkish European Central Bank (ECB) policymakers indicated that further easing of monetary policy should be gradual, given persistent underlying inflation pressures. On the economic front, across the Euro zone hourly wages and salaries grew at an annual rate of 4.5% in the three months through June, down from a revised 5.2% in the first.
Over in Japan, at its September 19–20 meeting, the Bank of Japan left its key short-term interest rate unchanged at around 0.25%, as had been widely anticipated. The BoJ has raised rates twice in 2024, in March and July. On the domestic data front, Japan’s core consumer price index (CPI) rose 2.8% year on year in August, in line with expectations and up from 2.7% in July. The overall CPI rose 3.0%, also matching consensus and up from the prior month’s 2.8%.
Chinese equities rose in a holiday-shortened week as the Fed’s decision to cut interest rates offset a batch of disappointing Chinese economic data. August data underscored the slowing momentum in China’s economy. Industrial production rose 4.5% from a year earlier, lagging forecasts and down from July’s 5.1% increase amid weaker commodity prices and auto sales. Retail sales expanded a below-consensus 2.1% from a year ago, easing from July’s 2.7% rise. Fixed asset investment rose a lower-than-expected 3.4% in the January to August period, down from the 3.6% expansion recorded in the first seven months this year, while property investment fell 10.2% year on year. Taken together, the indicators suggested growing risks for Beijing in meeting its economic growth target of about 5% this year.
Enjoy This Week’s Round-Up
Don’t Be A Rat Brain Trader, Be the Red Stripe Zebra !!
Trade Smart !
hpb
