Hey folk, very big week coming in in the markets. We have the Federal Reserve set to cut rates this coming Wednesday but markets are unsure if it will be a 25 bps or a 50 bps rate cut. It is about even odds which direction the Feds will go.
Get my take on market price action this week in this week’s round-up.
MARKET SOUND BITES:
Markets post solid gains and largely recovered from the previous week’s steep losses which saw the S&P 500 Index suffer its worst weekly decline since March 2023. The current market narrative has shifted to the FED being behind the markets in terms of slowing growth while just 9 months ago the FEDs were viewed as behind in containing inflation.
On Wednesday, stocks initially headed sharply lower following news that core (less food and energy) consumer inflation rose to 0.3% in August, a tick higher than consensus expectations. Meanwhile, headline inflation showed an annual increase of 2.5%, well below July’s increase of 2.9% and its lowest level since early 2021. The average rate for a 30-year, fixed-rate mortgage fell to 6.29%, the lowest level since February 2023 and well below the 7.21% year-ago level while home loan applications moved higher off August lows.
Treasury yields ticked lower during the week with the yield on the benchmark 10-year Treasury note trading at year-to-date lows the markets now split 50/50 on whether the FEDs will give us a 25-bps or a 50-bps rate cut on Wednesday. And the Futures markets are projecting over 100-bps cuts before the end of this year, which gives us only 3 Fed meetings to do so. With the Fed Funds rate about 2.5% over the rate of inflation (CPI = 2.9%/Current FED Rate = 5.5%/ difference of 2.6%) gives us a very restrictive policy.
In Europe, the ECB lowered its deposit rate for a second time this year, announcing a quarter-point cut to 3.5% that was in line with expectations. The move came amid signs of weakening economic growth and slowing inflation in the eurozone. The statement accompanying the announcement emphasized that the ECB remains cautious and indicated that the ECB is not “pre-committing to a particular rate path.” In the UK, their economy was unchanged for a second consecutive month in July as manufacturing output contracted.
In Japan, the BoJ will raise interest rates again this year according to the latest comments from members of the central bank’s board. They stated the short-term rate needs to be raised to at least around 1% in the second half of the BoJ’s projection period through fiscal 2026 to curb upside inflation risks and maintain price stability. On the economic front, Japan’s second-quarter gross domestic product (GDP) growth was revised lower. According to final data, the economy expanded an annualized 2.9% quarter on quarter, less than the 3.1% growth suggested by the preliminary reading and market forecasts of 3.2%. The CPI rose 2.5% year on year in August, slowing from the previous month’s 3.0% and below consensus estimates of 2.8% while the rebound in the yen has caused a sharp fall in import cost growth.
While in China, the CPI rose 0.6% in August from a year earlier, up from 0.5% in July, but below economists’ forecasts. Core inflation, which strips out volatile food and energy costs, increased 0.3%, slowing from July’s 0.4% rise, and marked the lowest level in over three years. In addition, the PPI fell 1.8% from a year ago, lagging forecasts and deepening from July’s 0.8% drop, extending the deflation in factory gate prices that began in late 2022. Meanwhile, exports exceeded forecasts in August, rising 8.7% from a year earlier, up from 7% growth in July being about the only bright spot in the Chinese Economy. Imports expanded a lower-than-expected 0.5% in August, easing from July’s 7.2% gain.
Enjoy This Week’s Round-Up
Don’t Be A Rat Brain Trader – Be the Red Strip Zebra !!
Trade Smart !
hpb
