US economics, inflation, and the Fed
The Federal Reserve has started reducing interest rates. At the September Federal Open Market Committee (FOMC) meeting, policymakers voted to reduce the federal funds rate by a half point, to 4.75%-5.00%. This brought an end to the most restrictive monetary policy in four decades and showed that the central bank was comfortable enough with the direction of inflation to begin cutting interest rates.
How much further the Federal Reserve lowers the benchmark short-term interest rate before year’s end will likely be data driven. The market consensus is a couple of quarter-point or half-point cuts are possible, as monetary policymakers are concerned about the labor market. The pace of jobs growth slowed over the summer months, and the number of positions available fell below eight million, to 7.67 million, in July, the lowest level since January of 2021.
The recent declines in labor market data suggest the economy is slowing. It also raises concerns as to how long the consumer sector will remain resilient if more people are out of work and having difficulty finding a job. The consumer also is racking up credit card debt at a record rate, with card balances totaling $1.14 trillion at the end of the second quarter. This may curtail the pace of spending in the months ahead, including the holiday shopping season, according to Value Line. On point, The Conference Board’s Consumer Confidence Index retreated to 98.7 in September, the largest decline in three years.
Global economy
JP Morgan does not anticipate a near-term economic contraction but is concerned about softening developed markets (DM) labor demand and sliding global manufacturing surveys. Those factors keep near-term recession risk elevated. However, there are plenty of reasons for sustained resilience, and a less appreciated risk is that this quarter’s positive final demand momentum and accelerated policy easing interact with supportive financial conditions to produce materially above-potential growth. This risk is amplified by the recent news of efforts in China to offset housing market weakness and the bank’s revised expectations for a faster pace of European Central Bank policy easing with a next cut in October.
Easing inflation, crude oil prices are moving lower and stand 15% below the 2Q24 average. To the extent that this reflects a weakening global economy falling oil prices should be seen as an additional signal of rising growth risk. But both JP Morgan’s commodity strategists’ assessment and the news on global demand suggest that the slide in oil largely reflects better news on supply. As such, the pass-through of lower oil prices to consumer price inflation should boost purchasing power, reinforcing the impact of policy rate normalization. The global energy CPI posted a significant decline in August, and the bank expects the drag from energy prices to intensify in the upcoming CPI releases.
So, with the inflation normalizing, the bank keeps its forecast for the US economy to expand at 2.7% this year and the global GDP at 2.6%.
Stock and bond markets
As Professor Siegel puts it:
“What to do about stocks and bonds? I don’t expect bond yields to fall from here. The 10-year bond yield rose on that bigger than expected rate cut because there was less risk of a recession from the Fed remaining too tight. I see the 10-year bond yield settling in this cycle between 4-5% — which corresponds to a neutral Fed Funds Rate of 3.5% and a positive term premium for taking on duration risk. The inverted yield curve we’ve had for the last two years is not normal and I do not see it lasting.
For stocks, yes valuations across many sectors appear stretched by historical standards, particularly in the technology sector and AI-driven companies. This reflects a broader market anticipation of substantial growth driven by technological advancements. As AI continues to evolve, it will be crucial to differentiate between companies that are genuinely creating value through innovative AI applications and those whose valuations are inflated by speculative interests. But I also expect AI utility to benefit broader companies in the economy and not just a narrow few.
The big rate cut should be very supportive for small cap companies that borrow at short-term borrowing rates, as they have been the ones most negatively impacted by Fed policy. They also have some of the lowest valuations in the U.S. market, which sets up for a good backdrop for relative performance.”
The information and opinions included in this document are for background purposes only, are not intended to be full or complete, and should not be viewed as an indication of future results. The information sources used in this letter are: WSJ.com, Jeremy Siegel, Ph.D. (Jeremysiegel.com), Goldman Sachs, J.P. Morgan, Empirical Research Partners, Value Line, BlackRock, Ned Davis Research, First Trust, Citi research, HSBC, and Nuveen.
IMPORTANT DISCLOSURE
Past performance may not be indicative of future results.
Different types of investments and investment strategies involve varying degrees of risk, and there can be no assurance that their future performance will be profitable, equal to any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.
The statements made in this newsletter are, to the best of our ability and knowledge, accurate as of the date they were originally made. But due to various factors, including changing market conditions and/or applicable laws, the content may in the future no longer be reflective of current opinions or positions.
Any forward-looking statements, information, and opinions including descriptions of anticipated market changes and expectations of future activity contained in this newsletter are based upon reasonable estimates and assumptions. However, they are inherently uncertain, and actual events or results may differ materially from those reflected in the newsletter.
Nothing in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice. Please remember to contact Signet Financial Management, LLC, if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and/or services. No portion of the newsletter content should be construed as legal, tax, or accounting advice.
A copy of Signet Financial Management, LLC’s current written disclosure statements discussing our advisory services, fees, investment advisory personnel, and operations are available upon request.
