Category: Economy

U.S. Existing Home Sales Hit 14-Year Low in September as Buyers Wait for Lower Rates

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Home sales dropped by 1.0% in September to the lowest level since 2010.
– Housing inventory rose 1.5%, but prices remained elevated, increasing 3% year-over-year.
– First-time homebuyers made up only 26% of sales, below the 40% needed for a robust market.

U.S. existing home sales fell to their lowest level in 14 years in September, reflecting ongoing challenges in the housing market as buyers continued to hold out for lower mortgage rates. According to the National Association of Realtors (NAR), home sales dropped 1.0% last month, bringing the seasonally adjusted annual rate to 3.84 million units, the lowest figure since October 2010. The decline surprised economists, who had forecasted no change at 3.86 million units.

The year-on-year picture was equally bleak, with sales down 3.5% from September 2023, marking a continuing trend of sluggish demand following the spike in mortgage rates earlier this year. While rates briefly dropped after the Federal Reserve’s recent decision to cut interest rates, they have climbed again over the last three weeks, fueled by strong economic data that has led traders to scale back expectations of further rate cuts next month.

The NAR speculated that the upcoming U.S. presidential election on November 5 might also be contributing to buyer hesitancy, although there is no hard evidence supporting this claim. “Some consumers may be delaying a major financial decision like purchasing a home until after the election,” noted Lawrence Yun, NAR’s chief economist. He added, however, that market conditions—such as more available inventory, lower mortgage rates compared to last year, and job gains—remain favorable for buyers who choose to act now.

Despite the increase in housing supply, prices have not dropped as some buyers had hoped. The median existing home price rose 3.0% year-over-year to $404,500 in September, with home prices increasing across all regions of the country. Housing inventory climbed 1.5% to 1.39 million units, the highest level since October 2020, providing buyers with more options, though still not enough to significantly lower prices.

At the current pace of sales, it would take 4.3 months to exhaust the existing supply of homes, up from 3.4 months a year ago. A balanced market typically has a supply range of four to seven months, so while the increase in inventory is welcome, it has yet to shift the balance enough to bring prices down.

First-time homebuyers continue to struggle in this market, making up only 26% of transactions, a slight drop from 27% last year. This is well below the 40% share that economists and realtors say is necessary for a healthy housing market. Many first-time buyers are being priced out due to high home prices and elevated borrowing costs.

Additionally, 30% of transactions in September were all-cash sales, up from 29% a year ago, as wealthier buyers and investors continue to dominate the market. Distressed sales, including foreclosures, made up just 2% of total transactions, similar to last year’s figures, indicating that most homeowners are not under extreme financial pressure to sell.

As the housing market continues to face uncertainty around mortgage rates and economic conditions, prospective buyers remain cautious. With elevated prices, and only modest improvements in supply, it is unclear when the market might see a full recovery in sales activity.

Stock Market Bounces Back as Investors Weigh Bond Yields and Earnings Reports

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– US stocks recovered after early-session declines on Tuesday, with the S&P 500, Dow, and Nasdaq rising slightly.
– Investors are closely monitoring bond yields, with the 10-year Treasury yield holding steady after sharp gains on Monday.
– Strong earnings from General Motors boosted the stock, while other companies like GE and Verizon faced mixed results.

US stocks recovered from earlier losses on Tuesday, as investors digested a bond market sell-off and anticipated upcoming earnings reports. The S&P 500 edged near the flatline, after falling by about 0.2% earlier in the day. The Dow Jones Industrial Average and the tech-heavy Nasdaq Composite also rose by approximately 0.1% and 0.2%, respectively.

The bond market has been a focal point for investors, with the 10-year Treasury yield holding around 4.2% following Monday’s surge. This rise pushed the yield above 4.2% for the first time since July, sparking concerns for rate-sensitive sectors like real estate, where increasing yields often lead to stock pullbacks.

Uncertainty surrounding the Federal Reserve’s next move is also weighing on market sentiment. Many investors are debating whether the Fed will continue to cut rates aggressively or maintain its current stance. Recent strong economic data and the possibility of fiscal shifts following the upcoming U.S. election are factors adding to this uncertainty. Republican nominee Donald Trump’s potential fiscal policies, combined with cautious comments from Fed officials, have fueled concerns that the Fed may not cut rates as expected.

In earnings news, General Motors (GM) delivered strong results, raising its guidance for the third time this year. Buoyed by solid electric vehicle (EV) sales, GM shares jumped more than 10% as the automaker posted a quarterly profit and revenue beat. Investors responded positively to the upbeat results, pushing GM’s stock to one of its best performances in recent months.

On the other hand, some major companies didn’t fare as well. GE Aerospace saw its stock fall by over 8% following its third-quarter report, while Verizon (VZ) shares dropped around 5% due to mixed earnings. Both companies highlighted ongoing challenges, which dampened investor enthusiasm.

Looking ahead, all eyes are on Tesla (TSLA), which is set to report earnings on Wednesday. Wall Street is eagerly awaiting the results as investors wonder whether the “Magnificent Seven” tech giants will continue to drive the stock market’s next upward move. Tesla’s performance, along with other key tech megacaps, will be crucial in determining the broader market direction.

Despite the rising bond yields, gold prices climbed, continuing to build on Monday’s record high. The gains in gold were driven by increased demand for safe-haven assets, as investors remain cautious amid the looming U.S. presidential election and escalating tensions in the Middle East.

As the market continues to grapple with rising yields, mixed corporate earnings, and geopolitical uncertainty, investors are treading carefully. With key earnings reports and economic data still to come, the next few days will be crucial in determining whether the stock market can sustain its recovery and whether the Fed will proceed with its anticipated rate cuts.

Fed’s Logan Advocates Gradual Rate Cuts Amid Continued Balance Sheet Reductions

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Fed’s Logan anticipates gradual rate cuts if the economy aligns with expectations.
– The Fed will continue shrinking its balance sheet, with no plans to halt quantitative tightening.
– Logan sees ongoing market liquidity, supporting continued balance sheet reductions.

Federal Reserve Bank of Dallas President Lorie Logan stated on Monday that gradual interest rate cuts are likely on the horizon if the economy evolves as expected. She also emphasized that the Fed can continue to reduce its balance sheet while maintaining market liquidity. Logan’s remarks were delivered at the Securities Industry and Financial Markets Association annual meeting in New York, where she discussed the central bank’s plans for monetary policy normalization.

“If the economy evolves as I currently expect, a strategy of gradually lowering the policy rate toward a more normal or neutral level can help manage the risks and achieve our goals,” said Logan. She acknowledged that the U.S. economy remains strong and stable, though uncertainties persist, especially concerning the labor market and the Fed’s inflation targets.

Market participants are currently divided over whether the Federal Reserve will follow through on its plan for half a percentage point in rate cuts before year-end, as forecasted during the September policy meeting. While inflation has shown signs of easing, recent jobs data indicates a robust labor market, which may lead the Fed to reconsider the pace and size of its rate cuts.

A significant portion of Logan’s remarks centered on the Fed’s ongoing quantitative tightening (QT) efforts, a process that began in 2022 to reduce the central bank’s holdings of mortgage-backed securities and Treasury bonds. These assets were initially purchased to stimulate the economy and stabilize markets during the early stages of the COVID-19 pandemic. The Fed has reduced its balance sheet from a peak of $9 trillion to its current level of $7.1 trillion, with plans to continue shedding assets.

Logan indicated that the Fed sees no immediate need to stop the balance sheet reductions, stating that both QT and rate cuts are essential components of the Fed’s efforts to normalize monetary policy. She emphasized that ample liquidity exists in the financial system, which supports the continuation of the balance sheet drawdown.

“At present, liquidity appears to be more than ample,” Logan noted, adding that one indicator of abundant liquidity is that money market rates continue to remain well below the Fed’s interest on reserve balances rate.

Recent fluctuations in money markets, Logan suggested, are normal and not a cause for concern. “I think it’s important to tolerate normal, modest, temporary pressures of this type so we can get to an efficient balance sheet size,” she said, reinforcing her confidence in the Fed’s current approach.

Looking ahead, Logan expects that the Fed’s reverse repo facility, which allows financial institutions to park excess cash with the central bank, will see minimal usage in the long run. She hinted that reducing the interest rate on the reverse repo facility could encourage participants to move funds back into private markets, further supporting liquidity outside of the central bank.

Logan also dismissed concerns about the Fed needing to sell mortgage-backed securities in the near term, stating that it is “not a near-term issue in my view.” She reiterated that banks should have comprehensive plans to manage liquidity shortfalls and should feel comfortable using the Fed’s Discount Window liquidity facility if needed.

Logan’s comments reflect a measured approach to managing monetary policy as the U.S. economy continues to recover and adjust to post-pandemic conditions. While inflation is cooling, the Fed remains focused on maintaining flexibility and ensuring stability in the financial system.

September CPI Shows Slight Inflation Increase as Jobless Claims Hit 14-Month High

Posted on by cpatches
Key Points:
– CPI rose by 0.2% in September, bringing annual inflation to 2.4%, slightly above expectations.
– Weekly jobless claims surged to 258,000, the highest in 14 months, influenced by hurricanes and strikes.
– The Federal Reserve is expected to continue lowering interest rates, with an 87.1% chance of a 25-basis-point cut in November.

The Consumer Price Index (CPI) rose by 0.2% in September, slightly higher than expected, bringing the annual inflation rate to 2.4%. This increase was 0.1 percentage point above both August’s reading and market expectations. Over the past 12 months, CPI has increased by 2.4%, outpacing the forecasted 2.3%. Core prices, which exclude food and energy, rose by 0.3% for the month.

Despite this increase, inflation continues to trend down from its peak earlier this year, hitting its lowest level since February 2021. Key price shifts included a 1.9% drop in energy prices, a 0.4% increase in food prices, and a 0.2% rise in shelter costs. These changes, while modest, reflect some external pressures, including the ongoing conflict in the Middle East and the lingering effects of natural disasters.

In labor market news, weekly jobless claims surged to a 14-month high, reaching 258,000 for the week ending October 5, an increase of 33,000 from the previous week. The rise in claims is partly attributed to hurricane and strike activity. Florida and North Carolina, impacted by Hurricane Helene, saw a combined increase of 12,376 jobless claims. Michigan, affected by the Boeing strike, reported an additional 9,490 claims.

Despite the uptick in unemployment claims, nonfarm payrolls rose significantly in September. The Federal Reserve remains focused on reaching its inflation target of 2% and has begun lowering benchmark interest rates, including a half-point reduction in September. Further rate cuts are anticipated, with futures markets pricing in an 87.1% chance of a 25-basis-point cut in November, according to the CME’s FedWatch Tool.

While inflation was slightly higher than expected, external factors like hurricanes, strikes, and global tensions continue to influence economic dynamics. The Fed remains optimistic that inflation will continue its downward trend, though unforeseen events and upcoming political changes could impact future economic stability.

Jobs Report Exceeds Expectations, with 254,000 Jobs Added

Posted on by cpatches
Key Points:
– The U.S. economy added 254,000 jobs in September, beating forecasts and driving the unemployment rate down to 4.1%.
– Average hourly earnings rose by 0.4% for the month, marking a 4% increase year-over-year, both exceeding estimates.
– The strong jobs report could lead the Federal Reserve to adopt a more gradual pace in reducing interest rates, signaling economic resilience despite moderating hiring trends.

The U.S. economy added 254,000 jobs in September, significantly surpassing the 150,000 consensus forecast and marking a sharp increase from the revised 159,000 jobs added in August. The unemployment rate fell to 4.1%, down from 4.2% in the prior month, as labor market conditions strengthened. Average hourly earnings also outperformed expectations, rising 0.4% in September, which brought the annual increase in wages to 4%.

Strong Job Gains Across Key Sectors

Food services and drinking places saw the largest growth, adding 69,000 jobs in September, followed by healthcare, which added 45,000 positions. Government jobs also contributed to the overall increase, ticking up by 31,000. The labor force participation rate remained unchanged at 62.7%, reflecting stability in workforce engagement despite the notable job gains.

Implications for the Federal Reserve’s Rate Path

This robust jobs report could ease concerns about the strength of the U.S. labor market and likely solidify the Federal Reserve’s stance on slowing the pace of interest rate reductions. The consistent improvement in key labor metrics may allow the Fed to take a more gradual approach, avoiding sharp rate cuts while still maintaining flexibility based on future economic data.

Earlier this week, Federal Reserve Chair Jerome Powell remarked that while the labor market remained solid, it had clearly cooled compared to last year. With hiring rates moderating and new claims for unemployment holding steady, Powell’s comments may align with the Fed’s cautious stance, even as stronger-than-expected jobs data shows resilience.

Historical Context: Jobs Reports and Market Movements

Historically, U.S. jobs reports play a pivotal role in shaping market expectations and influencing Federal Reserve policy. A stronger-than-anticipated jobs report like this one can drive investor confidence, often leading to a rally in equities and bond markets. Conversely, when labor market data shows signs of weakness, it can spark fears of an economic downturn, leading to volatility.

For the Federal Reserve, robust jobs reports often signal that the economy can withstand tighter monetary policies, such as higher interest rates, to combat inflation. However, when employment data weakens, it can prompt the Fed to ease its stance by reducing interest rates to stimulate growth. In this case, today’s report, with stronger-than-expected results across the board, may temper the pace of rate cuts, as the economy shows signs of resilience amid cooling inflationary pressures.

Fed’s Key Inflation Gauge Drops to 2.2% in August, Paving Way for Further Rate Cuts

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The PCE price index showed inflation at 2.2% in August, the lowest since early 2021.
– Core PCE, excluding food and energy, rose 2.7%, staying steady with July’s reading.
– The lower-than-expected inflation could prompt additional interest rate cuts by the Fed.

The Federal Reserve’s key inflation measure, the Personal Consumption Expenditures (PCE) price index, posted a notable drop to 2.2% in August, marking the lowest inflation rate since February 2021. This is a clear signal that inflation is continuing its downward trend, positioning the Fed for future interest rate cuts.

The PCE index, which measures the cost of goods and services in the U.S. economy, saw just a 0.1% increase in August from the previous month. Economists had expected the year-over-year inflation rate to settle at 2.3%, but the actual figure came in even lower, underscoring a continued easing of inflation pressures. This development further supports the Fed’s pivot toward focusing on labor market support, rather than aggressive inflation-fighting measures.

The core PCE index, which excludes the volatile food and energy prices, rose by 0.1% in August and maintained an annual increase of 2.7%, in line with economists’ expectations. This core measure is a preferred gauge for the Fed when assessing long-term inflation trends. The steady core inflation number is likely to reinforce the Fed’s decision-making, signaling that while inflation is cooling, there are still pressures, especially in key sectors such as housing.

The recent PCE numbers are particularly crucial as they come on the heels of the Fed’s decision to cut its benchmark interest rate by half a percentage point, lowering it to a target range of 4.75%-5%. It was the first time since March 2020 that the Fed made such a significant rate cut, deviating from its typical quarter-point moves.

With inflation easing closer to the Fed’s long-term 2% target, the latest data could pave the way for additional interest rate reductions by the end of the year. Many market participants expect the Fed to make another cut by half a percentage point before the year’s end, followed by further reductions in 2025.

Fed officials have gradually shifted their focus from solely managing inflation to also supporting the U.S. labor market. Recent data has indicated some softening in the job market, with Fed policymakers noting the need to balance between maintaining price stability and ensuring continued employment growth.

Chris Larkin, managing director of trading and investing at E-Trade from Morgan Stanley, commented on the positive inflation news, saying, “Inflation continues to keep its head down, and while economic growth may be slowing, there’s no indication it’s falling off a cliff.”

Despite the positive inflation report, personal income and spending data were weaker than expected. Personal income increased by 0.2%, while spending also rose by 0.2% in August. Both figures fell short of their respective forecasts of 0.4% and 0.3%. These softer numbers suggest that while inflation may be cooling, consumer demand remains fragile, posing potential risks to broader economic growth.

Looking ahead, investors and market watchers will be closely monitoring upcoming U.S. data, including personal consumption expenditures and jobless claims, for further clues about the Fed’s next move.

Mortgage Refinance Boom Takes Hold as Weekly Demand Surges 20%

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Refinancing applications surged 20% in one week amid declining mortgage rates.
– Mortgage rates fell to 6.13%, the lowest in two years, driving demand.
– The refinance share of mortgage applications reached 55.7% of total demand.

Mortgage refinance activity has seen a significant surge as homeowners across the United States rush to take advantage of falling interest rates. According to the Mortgage Bankers Association (MBA), applications to refinance home loans soared by 20% last week compared to the previous week, driven by the continuous decline in mortgage rates. This marks a stunning 175% increase in refinance demand from the same time last year.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) dropped to 6.13% from 6.15%. Though the change may seem small, the cumulative effect of eight straight weeks of declining rates is pushing homeowners to seize the opportunity for potential savings. Joel Kan, vice president and deputy chief economist at MBA, highlighted this ongoing trend: “The 30-year fixed rate decreased for the eighth straight week to 6.13%, while the FHA rate decreased to 5.99%, breaking the psychologically important 6% level.”

Refinance applications now make up 55.7% of all mortgage applications, showcasing how appealing the current rates are for homeowners. However, while the percentage rise is significant, the overall level of refinancing activity remains modest when compared to previous refinancing waves. The ongoing economic environment, combined with seasonal slowdowns in homebuying, has contributed to this pattern.

Despite the seasonal slowdown, mortgage applications to purchase homes rose just 1% over the last week, demonstrating that homebuyers are still facing challenges like high home prices and limited inventory. These factors have kept the pace of new home purchases relatively stable, with purchase applications only 2% higher than the same week last year.

One interesting takeaway from the latest data is that average loan sizes for both refinancing and home purchases have reached record highs. The overall average loan size hit $413,100 last week, the largest in the survey’s history. This reflects both the continued rise in home values and the larger loan amounts that homeowners are seeking, particularly in high-cost markets.

Looking ahead, mortgage rates have not seen significant movement at the start of this week. However, they may react as more pressing economic data, such as jobs reports and inflation numbers, are released in the coming weeks. Any developments in the broader economic outlook could influence the future path of mortgage rates, either stabilizing them or prompting further fluctuations.

For now, homeowners who have yet to take advantage of the current low rates are eyeing the market closely, as more savings could be realized with additional rate cuts. With mortgage rates remaining near their lowest levels in two years, the refinancing boom may continue to gain traction, especially if the Federal Reserve implements further rate cuts to counter slowing economic growth.

Fed’s “Recalibration” Explained: Shifting Monetary Policy for Economic Stability

Posted on by slightbourne@noblecapitalmarkets.com
Key Points
– Fed Chair Powell introduces the term “recalibration” to describe current monetary policy adjustments.
– The recalibration aims to maintain economic expansion and safeguard the labor market.
– The move reflects a shift from a rigid inflation focus to balancing economic growth.

Federal Reserve Chair Jerome Powell introduced a new term—“recalibration”—to describe a significant shift in the central bank’s monetary policy following its latest decision to cut interest rates. At a press conference after the recent Federal Open Market Committee (FOMC) meeting, Powell used the term to explain the Federal Reserve’s decision to reduce rates by 50 basis points without signs of major economic distress. The recalibration signals a transition from aggressive inflation-targeting measures toward a broader focus on maintaining economic expansion and securing a healthy labor market.

The half-point rate cut surprised markets and marked the first major rate cut beyond the typical 25 basis points in recent memory. Asset prices responded positively, with both the Dow Jones Industrial Average and the S&P 500 soaring to new highs. Investors took Powell’s recalibration narrative as a sign that the Fed is not panicking about the economy but instead taking preemptive measures to keep growth on track.

Economists, such as PGIM’s Tom Porcelli, pointed out that the recalibration allows the Fed to communicate that this easing cycle is about extending economic growth, not reacting to an imminent recession. This broader narrative shift gives the Fed more flexibility in its rate-cutting strategy, focusing on stabilizing the labor market while inflation moves closer to the 2% target.

Powell’s recalibration rhetoric also marks a clear distinction from previous buzzwords that haven’t always aged well. For instance, his infamous claim that inflation was “transitory” in 2021 eventually backfired as the Fed had to embark on an aggressive rate hike cycle. This new approach, however, aims to prevent any further economic slowdown, making adjustments in anticipation rather than reaction.

Some analysts, like JPMorgan’s Michael Feroli, still expect further rate cuts if the labor market continues to soften. Indeed, Powell emphasized that the recalibration is meant to “support the labor market” before any substantial downturn. While the economy remains relatively healthy, job creation has slowed recently, giving further justification for the recalibration.

Ultimately, Powell’s recalibration represents a shift in the Fed’s policy approach, focusing on broader economic health rather than just inflation control. Markets remain optimistic that this approach will provide stability and fuel further economic expansion.

US Weekly Jobless Claims Drop to Four-Month Low Amid Economic Growth

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Jobless claims fell by 12,000 to 219,000 last week, signaling a strengthening labor market.
– Unemployment rolls also shrank, suggesting steady job growth and economic expansion.
– The Federal Reserve’s recent rate cuts aim to support the job market during economic cooling.

The U.S. labor market demonstrated its resilience as the number of Americans filing new applications for unemployment benefits dropped to a four-month low last week. According to the Labor Department’s report, jobless claims fell by 12,000 to a seasonally adjusted 219,000 for the week ending September 14. This decrease signals that the labor market remains strong, even as other economic indicators show signs of slowing.

These jobless claims, the most current data on the health of the labor market, reflect continued strength in employment. This comes on the heels of the Federal Reserve’s decision to cut interest rates by 50 basis points — a move aimed at sustaining the current low unemployment rate and stabilizing the economy amid fears of a potential recession.

Federal Reserve Chair Jerome Powell emphasized the Fed’s commitment to maintaining a strong labor market, noting that it’s crucial to act when the economy is still showing signs of growth. Economists have echoed this sentiment, stating that the current job market, though cooling, has not reached a point of concern that would signal an imminent recession.

Last week’s data also showed that continuing claims, a measure of those receiving benefits for more than a week, dropped by 14,000 to 1.829 million. This is the lowest level since early June, and it reflects an ongoing trend of low layoffs and strong consumer spending, which has helped to buoy the economy.

The latest numbers suggest that the economy grew at an estimated 3.0% annualized rate in the third quarter, following similar growth in the second quarter. Despite some signs of a labor market cooldown, such as lower job openings and reduced hiring, the low level of layoffs indicates that the overall economy remains on a steady course.

This decline in claims came at a critical time, as it coincided with the government’s survey of business establishments for September’s employment report. The nonfarm payrolls report for August showed a gain of 142,000 jobs, below the monthly average of 202,000 jobs over the past year, further confirming that the labor market is cooling but not in decline.

Despite the reduction in hiring, Powell remains optimistic, noting that the Fed is prepared to act if needed but is confident in the current trajectory of the labor market. The continuing stability of the job market, combined with the Fed’s recent actions, indicates that the central bank is navigating the economy towards a soft landing rather than a recession.

Overall, while challenges remain, the reduction in jobless claims points to steady economic expansion, backed by a resilient labor market and supportive monetary policy measures.

Fed Lowers Interest Rates by Half Point in First Cut Since 2020

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The Federal Reserve cuts interest rates by 50 basis points to a range of 4.75%-5.0%.
– Two additional rate cuts are expected later this year, with four more in 2025.
– The decision reflects concerns about a slowing labor market and confidence in inflation returning to target levels.

The Federal Reserve cut interest rates by half a percentage point on Wednesday, marking its first rate reduction since 2020. This shift signals the conclusion of the Fed’s most aggressive inflation-fighting campaign since the 1980s. With this cut, the central bank’s benchmark interest rate now stands at a new range of 4.75%-5.0%, ending the 23-year high range it held since July 2023. The decision was part of the Federal Open Market Committee’s (FOMC) two-day policy meeting.

This rate cut comes amid mounting concerns over the slowing U.S. labor market and the Fed’s renewed confidence in inflation trending downward. Employment data for the summer reflected weaker job growth, with only 118,000 jobs created in June, followed by 89,000 in July and 142,000 in August—well below the monthly average from the previous year. Fed Chair Jerome Powell emphasized the need to support a strong labor market while continuing to work toward stable prices.

Fed officials are now projecting two more 25-basis point cuts before the end of the year, followed by four more cuts in 2025, creating a path for a total of six additional cuts in the coming years. While the decision was not unanimous, with Fed Governor Michelle Bowman preferring a smaller 25-basis point cut, the majority consensus agreed on a more aggressive approach.

Inflation, which had surged following the pandemic, has shown signs of cooling in recent months. The Consumer Price Index (CPI) has consistently reported progress, with inflation now nearing the Fed’s long-term target of 2%. This, combined with the weaker labor market, has given the Fed confidence to make this significant cut.

Jerome Powell’s comments at Jackson Hole in August hinted at the possibility of such a move. He stressed that the Fed would do everything possible to support a strong labor market and indicated that the central bank had the flexibility to lower rates further if needed. Wednesday’s decision reflects the Fed’s focus on both inflation and employment as key factors influencing future monetary policy.

Despite the easing of inflation, the Fed has remained cautious, signaling that while they expect inflation to continue its downward trend, they are still closely monitoring economic data. Officials also updated projections, predicting an uptick in the unemployment rate to 4.4% and stable economic growth of 2% for the next two years.

As investors and businesses adjust to the new monetary landscape, the Fed’s rate cut is expected to influence borrowing costs, stock market activity, and broader economic behavior. The next steps, as outlined by the central bank, will depend heavily on incoming data related to inflation and employment.

Fed Poised for First Rate Cut in Four Years as Market Speculates on Scale

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Investors expect the Fed to cut rates for the first time in four years.
– A 50 basis point cut is increasingly seen as possible, but a 25 basis point cut is more likely.
– The Fed will also provide guidance on future rate cuts and the economic outlook.

The Federal Reserve is set to cut interest rates for the first time in four years, marking a pivotal moment in its monetary policy approach. Investors and market analysts are divided on the expected size of the cut. Recent market moves suggest a growing possibility of a 50 basis point reduction, though a more conservative 25 basis point cut seems more likely, according to comments from several Federal Reserve officials.

The cut, which will bring the Federal Funds rate down to a range of 5.0% to 5.25%, represents a shift from the Fed’s aggressive inflation-fighting stance. The central bank has been steadily raising rates since 2022 to combat rising prices, but as inflation has started to slow, the Fed has turned its attention toward stabilizing the labor market and supporting economic growth.

According to Wilmington Trust bond trader Wilmer Stith, a 50 basis point cut, while a possibility, is still uncertain. He noted that a more moderate 25 basis point reduction might be the more palatable option for the Fed’s policy committee.

Recent economic data, including cooling inflation numbers, have spurred calls for a larger cut. However, the Fed remains cautious, emphasizing that it will continue to monitor the labor market and broader economic trends to determine the best course of action for future cuts.

Chief economist Michael Feroli from JPMorgan has called for a more aggressive 50 basis point cut, arguing that the shift in risks justifies a bolder move. He believes that the central bank needs to recalibrate its policy to maintain economic stability. Conversely, former Kansas City Fed president Esther George expects a more modest quarter-point cut, noting that the Fed might use this opportunity to signal the potential for deeper cuts later in the year.

Fed Chair Jerome Powell has emphasized the importance of sustaining a strong labor market, pledging to do everything possible to avoid further deterioration. He has expressed concern over economic weakening and stressed that the Fed has sufficient room to cut rates if needed to support the economy. However, Powell also acknowledged that inflationary pressures have started to ease, and that gives the central bank flexibility.

The Federal Open Market Committee (FOMC) will also release updated projections for unemployment, inflation, and economic growth alongside the rate decision. These forecasts, particularly the “dot plot” outlining future rate expectations, will provide important guidance on the central bank’s approach to monetary policy through the end of the year and into 2025.

Investors will be watching closely, with the potential for deeper cuts likely to influence market sentiment. Powell’s press conference following the rate decision is expected to shed light on the Fed’s next moves, offering insights into how aggressively the central bank will act to safeguard the economy from potential recession risks.

US Dollar Sinks to One-Year Low Against Yen Amid Growing Speculation of Aggressive Fed Rate Cut

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The U.S. dollar hits its lowest level in over a year against the yen, driven by expectations of a larger-than-expected Fed rate cut.
– Market pricing now reflects a 61% chance of a 50-basis-point cut at this week’s Federal Reserve meeting.
– This volatility comes as other central banks, like the Bank of Japan and Bank of England, are expected to hold rates, creating a global divergence in monetary policy.

The U.S. dollar has plummeted to its lowest level in over a year against the Japanese yen, fueled by growing market speculation that the Federal Reserve may adopt a more aggressive approach to rate cuts. Following reports from The Wall Street Journal and Financial Times, traders are increasingly betting on a 50-basis-point (bp) cut during the Fed’s policy meeting this week, up from the previously anticipated 25-bp cut. This shift has caused ripples across the currency and bond markets, with investors closely monitoring the broader impact on global markets and the U.S. economy.

The U.S. Federal Reserve’s monetary policy decisions have far-reaching effects, not only on domestic markets but also on global financial stability. As the central bank weighs its options, the potential for a larger-than-expected rate cut is being driven by concerns about weakening inflation data and slowing economic growth. Last week’s softer Consumer Price Index (CPI) numbers added to the narrative that the Fed might be willing to move more aggressively to support the economy, despite earlier hawkish signals.

As expectations for a 50-bp cut grow, the U.S. dollar has seen a sharp decline against key currencies, including the Japanese yen. The dollar fell as low as 139.58 yen during Monday’s Asian trading hours, marking the lowest point since July 2023. This drop reflects the mounting concern that the dollar will weaken further if the Fed makes an aggressive cut, narrowing the interest rate gap between the U.S. and other countries like Japan, which has kept its rates low for an extended period.

Currency markets have been particularly sensitive to central bank actions, and the U.S. dollar’s recent dip is a prime example of this. The divergence in monetary policies between the Federal Reserve, the Bank of Japan (BOJ), and the Bank of England (BoE) has created a complex dynamic. While the Fed is now considering rate cuts to stimulate the economy, the BOJ is expected to hold rates steady at 0.25% at its policy meeting later this week. Meanwhile, the Bank of England is also expected to keep its key rate at 5% after initiating a small rate cut in August.

This growing disparity in interest rates is driving the yen higher, as investors unwind yen-funded carry trades—investments made by borrowing in yen to purchase higher-yielding foreign assets. The narrowing interest rate gap between Japan and the U.S. has caused these trades to lose their appeal, pushing the yen higher and the dollar lower. The broader foreign exchange (FX) market has also seen major currencies like the euro and the British pound rise against the dollar, signaling global uncertainty about the U.S. economic outlook.

The potential for a 50-bp Fed rate cut presents both opportunities and risks for investors. On one hand, lower interest rates could spur economic activity by making borrowing cheaper and encouraging investment. This could provide a boost to stock markets, particularly in sectors like technology and consumer goods, which tend to benefit from looser monetary policy.

On the other hand, a weaker dollar could create challenges for U.S. companies with significant international operations. As the dollar falls, the cost of imported goods rises, leading to potential inflationary pressures. Additionally, for companies that generate significant revenue abroad, a weaker dollar could erode profit margins when converting foreign earnings back into U.S. dollars.

As the Federal Reserve’s September meeting approaches, all eyes will be on how policymakers navigate this delicate balance. A 50-bp cut, if it happens, would represent a significant shift from the Fed’s earlier signals of a more gradual approach to rate reductions. Traders are pricing in a 61% chance of this larger cut, compared to just 15% last week, highlighting the rapid change in market expectations.

Meanwhile, the global financial system will continue to adjust to the diverging monetary policies of major central banks. Investors, particularly those involved in currency trading or holding international assets, will need to remain vigilant as the Fed’s decision could prompt further volatility across markets.

In the near term, the U.S. dollar’s performance against major currencies will serve as a key indicator of investor sentiment. If the Fed opts for a less aggressive cut, the dollar could regain some strength. However, if the central bank signals a prolonged period of rate cuts, the dollar’s weakness may persist, especially against currencies like the yen and the euro, which are being supported by their respective central banks’ policies.

Stocks Rise and Gold Hits Record High Amid Expectations for Larger Fed Rate Cut

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Investors now expect a potential 50-basis point Fed rate cut next week, up from prior expectations of a 25-basis point reduction.
– Gold reaches a record high, supported by dollar weakness and looming rate cuts.
– Crude oil continues its rally as hurricane-related supply concerns rise.

U.S. stocks opened higher on Friday, and gold surged to a record high, as investors grew increasingly optimistic about the Federal Reserve’s potential for a 50-basis point interest rate cut next week. Earlier, market expectations had pointed to a smaller 25-basis point reduction, but reports from The Financial Times and The Wall Street Journal suggested the decision might be more evenly split than previously thought. These reports have caused a sharp change in market sentiment, driving gains in multiple sectors.

In early trading, all three major U.S. stock indexes saw positive movements, with the Dow Jones Industrial Average up 0.36%, the S&P 500 gaining 0.26%, and the Nasdaq Composite climbing 0.16%. Investors are now positioning themselves for potential rate cuts, encouraged further by influential voices like former New York Federal Reserve President Bill Dudley, who said during a forum in Singapore that “there’s a strong case for 50,” referencing a more significant rate cut.

Beyond the scope of next week’s interest rate decision, market participants are also closely watching the Federal Reserve’s forward guidance, particularly its dot plot projections and the statements from Chair Jerome Powell at the post-meeting press conference. According to analysts at TD Securities, the decision could be more contentious than anticipated, with the Fed expected to maintain a broadly dovish tone moving forward.

Gold Prices Surge on Dollar Weakness

Gold prices soared to a record high of $2,579.61 per ounce, marking its strongest weekly gain since mid-August. Investors flocked to the safe-haven asset, which benefits from a weakening U.S. dollar and expectations of further rate cuts. Gold’s appeal tends to rise when interest rates are cut, as lower rates reduce the opportunity cost of holding non-yielding assets like gold.

The U.S. dollar saw significant declines, dropping as much as 1% against the yen to 140.36, its weakest level since December 2023. The dollar index, which tracks the currency against major global counterparts, fell to a one-week low at 101.00. The Japanese yen’s strength was also bolstered by hawkish comments from Bank of Japan officials, signaling potential policy tightening in Japan.

Treasury Yields and Crude Oil React

In the bond market, U.S. Treasury prices rose, causing yields to fall. The benchmark 10-year Treasury yield dropped 2.1 basis points to 3.659%, while rate-sensitive two-year yields fell 6.8 basis points to 3.5803%. The rally in Treasuries indicates growing market confidence in further rate cuts by the Federal Reserve.

Crude oil prices continued to climb, with prices reaching $69.51 per barrel as producers assess the impact of Hurricane Francine, which tore through the Gulf of Mexico. The storm has raised concerns over potential disruptions in oil production, further supporting the upward trend in oil prices.

Market Outlook

As the week progresses, investors will be closely monitoring the Fed’s rate decision and the accompanying guidance on future monetary policy. With inflation easing and economic indicators pointing to slower growth, the market anticipates that further rate cuts may follow throughout the rest of the year. This sentiment has helped lift stocks, gold, and oil, creating a more bullish outlook for the markets in the short term.