Tag: Inflation

Wall Street Rises as August PPI Data Points to Modest Rate Cut by the Fed

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Wall Street’s main indexes rose after August producer price data reinforced expectations of a 25-basis point rate cut.
– Moderna shares tumbled following a weak revenue forecast, while communication services led sector gains.
– Gold miners surged, benefiting from record-high gold prices.

Wall Street’s major indexes climbed Thursday, buoyed by producer price index (PPI) data that met expectations, pointing to a smaller interest rate cut by the Federal Reserve. The PPI for August showed a 0.2% increase, slightly higher than the anticipated 0.1%, while core prices (excluding volatile food and energy) rose 0.3%, indicating that inflation pressures are continuing to ease but remain a concern. This data has solidified investor expectations of a 25-basis point rate cut at the Fed’s September 17-18 meeting, as opposed to a more aggressive 50-basis point cut.

The stock market responded positively, with the Dow Jones Industrial Average up 0.40%, the S&P 500 gaining 0.70%, and the Nasdaq Composite rising 1.04%. The report also showed initial claims for unemployment benefits at 230,000, aligning with estimates and signaling that the labor market is cooling but remains stable.

Investors remain optimistic despite concerns over inflation, with some bargain hunting occurring in the more economically sensitive small-cap Russell 2000 index, which outperformed with a 1.4% rise. According to Chuck Carlson, CEO of Horizon Investment Services, “There’s a willingness among investors to buy on declines,” highlighting growing confidence in a more controlled inflation environment.

However, Moderna faced significant losses, dropping over 11.5% after issuing a disappointing revenue forecast for fiscal year 2025, citing a lower-than-expected demand for vaccines. This dragged down the healthcare sector, although the rest of the market showed strength in communication services and gold mining stocks. Shares of Warner Bros. Discovery surged nearly 9% following news of a strategic partnership with Charter Communications, further boosting investor sentiment in the media and communications space.

The gold mining sector was another bright spot in the market, with spot gold prices reaching new highs, driving up the Arca Gold BUGS index by 6.3%. Investors flocked to gold as a safe-haven asset amid global economic uncertainties, propelling mining stocks like Newmont Corporation and Barrick Gold.

The backdrop of cooling inflation is encouraging for investors who anticipate that the Fed will begin a more dovish monetary policy cycle. A quarter-point rate cut would mark the first reduction since March 2020, when the pandemic triggered rapid monetary easing. With the U.S. central bank likely to cut rates next week, expectations for further rate reductions in 2024 are growing, depending on how inflation and labor market data evolve.

Looking ahead, investors will continue to monitor economic indicators closely, especially as concerns about the health of the U.S. economy persist. While inflation appears to be retreating, the possibility of a broader economic slowdown could influence market sentiment in the coming months. For now, the stock market is riding high on the belief that the Federal Reserve’s actions will continue to support growth while taming inflation.

Federal Reserve Expected to Deliver Quarter-Point Rate Cut Amid Mixed Inflation Data

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The Fed is likely to cut interest rates by a quarter of a percentage point at its September meeting.
– Mixed inflation data and concerns about the labor market are driving the Fed’s cautious approach
– Traders now expect a year-end policy rate of 4.25%-4.50%, reflecting expectations for further reductions.

The U.S. Federal Reserve is expected to cut interest rates by a quarter of a percentage point at its upcoming September 17-18 policy meeting, marking the beginning of long-anticipated rate reductions. This move comes as the Fed aims to balance reducing inflationary pressures without triggering a recession. Although inflation is still above the Fed’s target, the latest data has provided enough room for the central bank to begin easing its monetary stance.

Wednesday’s release of the Consumer Price Index (CPI) showed a 2.5% increase in August compared to the previous year, down from the 2.9% recorded in July. Core inflation, which excludes volatile food and energy prices, remained steady at 3.2%, with shelter costs unexpectedly accelerating. These mixed signals have complicated the Fed’s decision-making process, with officials choosing a more conservative approach to rate cuts rather than aggressive reductions.

Peter Cardillo, chief market economist at Spartan Capital Securities, noted that the steady core inflation figures signal ongoing concerns. “This report shows core inflation is still a question mark,” Cardillo said, adding that this likely confirms a quarter-percentage-point rate cut from the Fed.

Since July of last year, the Fed has kept interest rates within a range of 5.25% to 5.50%, seeking to curb inflation while preventing significant harm to the labor market. Despite some progress, the Fed’s efforts to bring inflation down to its 2% target have been slower than anticipated. However, Fed officials have indicated that they wish to avoid overcorrecting and stifling the economy, particularly given recent indications that the labor market is cooling.

The latest employment data showed that U.S. hiring has slowed in recent months, but with the unemployment rate ticking down to 4.2% in August, there is no immediate need for the Fed to take drastic action. Instead, a cautious quarter-point reduction appears to be the favored course of action, aimed at offering support to the economy while still maintaining pressure on inflation.

Economist Thomas Simons of Jefferies pointed out that while inflation has not reaccelerated, the latest data offers fewer signs of continued disinflation compared to previous months. This has led traders to adjust their rate expectations, now anticipating a year-end policy rate of 4.25%-4.50%. This suggests that markets are pricing in further rate cuts, including the possibility of a half-percentage-point reduction before the end of the year.

The Fed’s decision next week will be closely watched by investors, economists, and policymakers alike. While a quarter-point cut is widely expected, the central bank’s updated projections for the path of interest rates will offer further insights into how aggressively the Fed plans to ease monetary policy in the coming months. With inflation data continuing to send mixed signals, the Fed’s strategy of gradual rate cuts reflects a desire to keep the economy stable while addressing price pressures.

As traders adjust their positions ahead of the Fed’s meeting, the focus will remain on key economic indicators like inflation and employment. Any unexpected shifts in these metrics could lead to adjustments in market expectations, but for now, the consensus points to a slow and cautious path toward lower interest rates.

S&P 500 Slides 1%, Capping Worst Week in a Year Amid Tech Selloff and Weak Jobs Report

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The S&P 500 falls 1%, heading for its worst weekly performance since March 2023.
– Weaker-than-expected August jobs report sparks concerns about the U.S. economy.
– Tech giants like Amazon and Alphabet lead the market decline, with the Nasdaq shedding 2.5%.

Friday saw the S&P 500 take a sharp 1% drop, closing out its worst week since March 2023. The selloff came in response to a weak August jobs report and a broader selloff in technology stocks, as investors grew increasingly concerned about the state of the U.S. economy.

The broad-market S&P 500 index dropped 1.7% for the day, while the tech-heavy Nasdaq Composite sank by 2.5%. The Dow Jones Industrial Average also fell, losing 410 points, or about 1%.

According to Emily Roland, co-chief investment strategist at John Hancock Investment Management, the market’s recent volatility has been largely sentiment-driven. Investors are torn between fears of economic slowdown and hopes that weaker economic data may force the Federal Reserve to step in with more aggressive rate cuts.

“The market’s oscillating between this idea of is bad news bad news, or is bad news good news,” Roland said. Investors are grappling with the possibility that soft labor market data might push the Fed to cut interest rates more sharply than initially anticipated.

The technology sector bore the brunt of the selloff on Friday. Megacap tech stocks, including Amazon and Alphabet, were hit hard, both losing over 3%. Microsoft and Meta Platforms also saw losses exceeding 1%. Meanwhile, chip stocks faced a particularly tough day, with Broadcom plummeting 9% after issuing weak guidance for the current quarter. This dragged down other semiconductor players like Nvidia, Advanced Micro Devices (AMD), and Marvell Technology, each falling over 4%.

The VanEck Semiconductor ETF, which tracks the performance of major semiconductor companies, dropped 4%, making this its worst week since March 2020. Investors appeared to be fleeing high-growth, high-risk sectors like tech as concerns about the broader economic slowdown took center stage.

Adding to the uncertainty was the August nonfarm payrolls report, which showed the U.S. economy added just 142,000 jobs last month, falling short of the 161,000 that economists had anticipated. While the unemployment rate dipped slightly to 4.2%, in line with expectations, the soft job creation numbers are fueling fears of a weakening labor market.

The weaker jobs data has heightened worries about the U.S. economy’s trajectory, further spooking already jittery markets. Charles Ashley, a portfolio manager at Catalyst Capital Advisors, noted that the market is currently in a state of flux, with investors looking to the Federal Reserve for clearer direction.

Market expectations have shifted sharply in response to the data. Investors now widely expect the Fed to cut rates by at least a quarter of a percentage point at its September policy meeting. However, the deteriorating labor market has raised speculation that the Fed may opt for a larger, 50 basis point rate cut instead.

According to the CME Group’s FedWatch tool, nearly half of traders are pricing in the likelihood of a 50 basis point rate reduction in light of the softening economic conditions.

Friday’s jobs report capped a turbulent week for equities, with the S&P 500 and Nasdaq both posting their worst weekly performances in months. The S&P 500 is down about 4% for the week, while the Nasdaq shed 5.6%. The Dow didn’t fare much better, dropping 2.8%.

As investors brace for the Federal Reserve’s next move, volatility in the market seems likely to persist, especially as concerns about the health of the U.S. economy continue to mount.

A Bigger Rate Cut in September Could Spell Trouble for Market

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Investors anticipate a 50 basis point rate cut in September due to weakening job market data.
– A larger cut may signal recession fears, not inflation control, spurring market sell-offs.
– The current economic “soft landing” could be a temporary illusion as the labor market weakens.

The market is abuzz with speculation that the Federal Reserve might deliver a larger-than-expected interest rate cut in September, driven by recent signs of economic softness. While many investors are hoping for a 50 basis point cut, especially after the latest JOLTS report showing the lowest job openings since 2021, they may want to be cautious. A deeper rate cut isn’t necessarily the good news it might seem on the surface.

The JOLTS data, coupled with last month’s jobs report, has raised concerns that the labor market could be weakening more rapidly than anticipated. Investors are now looking to Friday’s employment numbers with increased apprehension, and Fed fund futures are reflecting expectations of a significant rate cut at the Federal Reserve’s next meeting. But before the market gets too excited about the prospect of lower rates, it’s important to consider the message a large cut would send.

A 50 basis point cut would likely indicate that the Federal Reserve is more worried about a looming recession than ongoing inflation. According to David Sekera, Morningstar’s chief US market strategist, such a cut could trigger an even deeper stock market sell-off. The move would suggest that the Fed sees significant risks to the economy, much like a pilot deploying oxygen masks in mid-flight—hardly a signal of smooth skies ahead.

Other experts are also expressing caution. Citi’s chief US economist Andrew Hollenhorst points out that the market seems to be in denial about the growing signs of labor market weakness, just as it was slow to accept the seriousness of inflation during its early stages. Hollenhorst emphasizes that the unemployment rate has been gradually rising for months now, not just a one-off event. This slow deterioration suggests the labor market is indeed weakening, and a larger rate cut could be the Fed’s acknowledgment of that fact.

While moderating inflation does provide the Fed with some breathing room to focus on supporting the economy, the idea that the economy is still in a “Goldilocks” phase—where inflation is cooling, and the job market remains resilient—might be wishful thinking. Investors should be careful what they wish for when it comes to monetary policy, as the short-term benefits of lower rates could be overshadowed by the reality of a deeper economic slowdown.

Bond Market’s Yield Curve Normalizes, Easing Recession Concerns but Raising Caution

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The bond market’s yield curve briefly normalizes after two years of inversion.
– Economic data and Fed comments contribute to the shift, though recession risks remain.
– Lower job openings and potential rate cuts add complexity to economic outlook.

The bond market witnessed a significant shift on Wednesday as the yield curve, a closely-watched economic indicator, briefly returned to a normal state. The relationship between the 10-year and 2-year Treasury yields, which had been inverted since June 2022, saw the 10-year yield edge slightly above the 2-year. This inversion had been a classic signal of potential recession, making this reversal noteworthy for economists and investors alike.

The normalization followed key economic developments, including a surprising drop in job openings and dovish remarks from Atlanta Federal Reserve President Raphael Bostic. The Labor Department reported that job openings fell below 7.7 million in the latest month, indicating a shrinking gap between labor supply and demand. This decline is significant given the post-pandemic period when job openings had far outpaced available workers, contributing to inflationary pressures.

Bostic’s comments, suggesting a readiness to lower interest rates even as inflation remains above the Federal Reserve’s 2% target, further influenced market dynamics. The potential for rate cuts is generally seen as a positive for economic growth, particularly after the Fed has kept rates at a 23-year high since July 2023. However, the shift in the yield curve does not necessarily signal an all-clear for the economy. Historically, the curve often normalizes just before or during a recession, as rate cuts reflect the Fed’s response to an economic slowdown.

Despite the market’s focus on the 2-year and 10-year yield relationship, the Federal Reserve places greater emphasis on the spread between the 3-month and 10-year yields. This segment of the curve remains steeply inverted, with a difference exceeding 1.3 percentage points. The ongoing inversion here suggests that while the bond market may be sending mixed signals, the broader economic outlook remains uncertain.

The recent price action underscores the delicate balance the Fed faces in managing inflation while avoiding triggering a recession. As investors digest these developments, the brief normalization of the yield curve offers a glimmer of hope but also a reminder of the complex and potentially turbulent road ahead.

Consumer Spending Surge: Fed’s Rate Cut Hopes Face Economic Resilience

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– U.S. consumer spending increased 0.5% in July, showing economic strength
– Inflation remains moderate, with PCE price index rising 2.5% year-on-year
– Robust spending challenges expectations for aggressive Fed rate cuts

In a surprising turn of events, U.S. consumer spending showed remarkable strength in July, potentially altering the Federal Reserve’s monetary policy trajectory. This robust economic indicator may put a damper on expectations for aggressive interest rate cuts, particularly the anticipated half-percentage-point reduction in September.

Consumer spending, which accounts for over two-thirds of U.S. economic activity, rose by 0.5% in July, following a 0.3% increase in June. This uptick, aligning with economists’ forecasts, suggests the economy is on firmer ground than previously thought. After adjusting for inflation, real consumer spending gained 0.4%, maintaining momentum from the second quarter. Conrad DeQuadros, senior economic advisor at Brean Capital, notes, “There is nothing here to push the Fed to a half-point cut. This is not the kind of spending growth associated with recession.”

While spending surged, inflation remained relatively contained. The Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation gauge, rose 0.2% for the month and 2.5% year-on-year. Core PCE inflation, which excludes volatile food and energy prices, increased by 0.2% monthly and 2.6% annually. These figures, while showing progress towards the Fed’s 2% target, indicate that inflationary pressures persist, potentially complicating the central bank’s decision-making process.

Despite a jump in the unemployment rate to a near three-year high of 4.3% in July, which initially stoked recession fears, the labor market continues to generate decent wage growth. Personal income rose 0.3% in July, with wages climbing at the same rate. This suggests that the slowdown in the labor market is primarily due to reduced hiring rather than increased layoffs.

Fed Chair Jerome Powell recently signaled that a rate cut was imminent, acknowledging concerns over the labor market. However, the strong consumer spending data may force the Fed to reconsider the pace and magnitude of potential rate cuts. David Alcaly, lead macroeconomic strategist at Lazard Asset Management, offers a longer-term perspective: “There’s a lot of focus right now on the pace of rate cuts in the short term, but we believe it ultimately will matter more how deep the rate-cutting cycle goes over time.”

The Atlanta Fed has raised its third-quarter GDP growth estimate to a 2.5% annualized rate, up from 2.0%. This revision, coupled with the strong consumer spending data, paints a picture of an economy that’s more resilient than many had anticipated. The increase in spending was broad-based, covering both goods and services. Consumers spent more on motor vehicles, housing and utilities, food and beverages, recreation services, and financial services. They also boosted spending on healthcare, visited restaurants and bars, and stayed at hotels.

As the Fed navigates this complex economic landscape, investors and policymakers alike will be closely watching for signs of whether the central bank will prioritize fighting inflation or supporting economic growth in its upcoming decisions. The robust consumer spending data suggests that the economy may not need as much support as previously thought, potentially leading to a more cautious approach to rate cuts.

For investors, this economic resilience presents both opportunities and challenges. While strong consumer spending bodes well for many sectors, it may also lead to a less accommodative monetary policy than some had hoped for. As always, a diversified approach and close attention to economic indicators will be crucial for navigating these uncertain waters.

The Troubling Revision: U.S. Employment Figures Adjusted Downward by 818,000

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Significant downward adjustment in U.S. employment data
– Diverging views on implications of backward-looking data
– Labor market concerns shape Fed’s policy path forward

The U.S. economy employed 818,000 fewer people than originally reported as of March 2024, according to a government revision. This substantial adjustment suggests the labor market may have been cooling much earlier than initially thought.

The Bureau of Labor Statistics’ annual data revision showed the largest downward changes in the professional and business services industry, which saw a reduction of 358,000 jobs, and the leisure and hospitality sector, which experienced a 150,000 job cut. These revisions move the monthly job additions down to 174,000 from the initial 242,000.

While Omair Sharif of Inflation Insights described the adjusted growth rate as “still a very healthy” one, the revised figures raise concerns about the true state of the labor market. Economists, however, caution against overreacting, noting that the realization of fewer jobs created “does not change the broader trends” in the economy.

The timing of this revision is particularly significant, as recent signs of labor market slowing have fueled debates about the Federal Reserve’s monetary policy stance. The weak July jobs report and the rise in the unemployment rate, which triggered a recession indicator, have prompted discussions about the appropriate course of action.

As Federal Reserve Chair Jerome Powell prepares to speak at the Jackson Hole Symposium, the labor market is expected to be a key focus. Economists anticipate Powell may express more confidence in the inflation outlook while highlighting the downside risks in the labor market, potentially paving the way for a series of interest rate cuts in the coming months.

The diverging perspectives on the employment data revision underscore the complexities in interpreting economic signals and their potential impact on policymaking. As the U.S. economy navigates a delicate balance between slowing growth and persistent inflationary pressures, the employment data revision serves as a stark reminder of the need for a nuanced, data-driven approach to economic decision-making. Furthermore, the size of the revision highlights the importance of closely monitoring and accurately measuring the labor market, as these figures play a crucial role in guiding policymakers and shaping economic strategies.

Federal Reserve’s September Rate Cut Looks Increasingly Likely

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– July’s inflation data shows continued cooling, potentially paving the way for a Fed rate cut in September.
– Traders are split between expectations of a 25 or 50 basis point cut.
– The upcoming jobs report will be crucial in determining the size of the potential rate cut.

The latest inflation data has ignited speculation that the Federal Reserve may be poised to cut interest rates as soon as September, marking a potential turning point in monetary policy. July’s Consumer Price Index (CPI) report, released on Wednesday, showed inflation continuing to cool, with the annual rate dropping to 2.9% from June’s 3%. This milder-than-expected reading has removed one of the last hurdles standing in the way of the Fed’s first rate cut in four years.

Fed Chair Jerome Powell had previously indicated that a September rate cut was “on the table,” contingent on supportive economic data. The recent CPI figures appear to align with the Fed’s goal of seeing inflation move “sustainably” towards their 2% target. Nathan Sheets, global chief economist for Citigroup, described the report as a “green light” for the Federal Reserve to act in September.

The financial markets have responded swiftly to this news, with traders now pricing in a 100% probability of a rate cut in September. However, opinions are divided on the magnitude of the potential cut, with odds split roughly evenly between a 25 and a 50 basis point reduction, according to the CME FedWatch Tool.

While the inflation data is encouraging, the Fed will be closely watching two more critical economic reports before its September 17-18 meeting. The core Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation gauge, will be released on August 30, followed by the Bureau of Labor Statistics’ jobs report on September 6. These reports, particularly the employment data, will likely play a crucial role in determining the size of any potential rate cut.

The most recent jobs report has already shown signs of a cooling labor market, with the unemployment rate rising to 4.3% in July, its highest level since October 2021. This development has led some critics to argue that the Fed may have waited too long to start lowering interest rates, potentially risking a recession.

However, opinions on the Fed’s timing vary among experts. Rob Kaplan, Goldman Sachs vice chairman, suggested that while the Fed might be slightly late in hindsight, it would only be by “a meeting or two.” On the other hand, Mark Zandi, chief economist at Moody’s Analytics, believes the Fed “should’ve been cutting rates months ago.”

The potential rate cut comes after a prolonged period of monetary tightening aimed at combating high inflation. The Fed has kept interest rates at a 23-year high for the past year, and a shift towards easing policy would mark a significant change in strategy.

As September approaches, all eyes will be on the upcoming economic data and any signals from Fed officials. Atlanta Fed President Raphael Bostic has expressed a desire to see “a little more data” before supporting a rate cut, highlighting the delicate balance the Fed must strike between controlling inflation and maintaining economic growth.

The potential rate cut holds significant implications for consumers and businesses alike. Lower interest rates could lead to reduced borrowing costs for mortgages, car loans, and credit cards, potentially stimulating economic activity. However, the Fed must carefully navigate this transition to avoid reigniting inflationary pressures or causing economic instability.

As the financial world eagerly awaits the Fed’s September decision, it’s clear that the coming weeks will be crucial in shaping the trajectory of U.S. monetary policy and, by extension, the broader economic landscape.

Private Sector Job Growth Slows in July, Signaling Potential Economic Shift

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Private payrolls increased by only 122,000 in July, below expectations and the slowest growth since January.
– Wage growth for job-stayers hit a three-year low at 4.8% year-over-year.
– The slowdown in job and wage growth aligns with the Federal Reserve’s efforts to curb inflation.

The latest ADP report on private sector employment has revealed a significant slowdown in job growth for July 2024, potentially signaling a shift in the U.S. economic landscape. According to the report, private companies added just 122,000 jobs in July, falling short of the 150,000 forecast by economists and marking the slowest growth since January. This figure represents a notable deceleration from June’s upwardly revised 155,000 job additions.

Alongside the tepid job growth, the report highlighted a continued moderation in wage increases. For employees who remained in their positions, wages rose by 4.8% compared to the previous year, the smallest increase observed since July 2021. This slowing wage growth trend could be seen as a positive development in the Federal Reserve’s ongoing battle against inflation.

ADP’s chief economist, Nela Richardson, interpreted these figures as indicative of a labor market that is aligning with the Federal Reserve’s inflation-cooling efforts. She noted that if inflation were to increase again, it likely wouldn’t be due to labor market pressures.

The job growth in July was primarily concentrated in two sectors: trade, transportation and utilities, which added 61,000 workers, and construction, contributing 39,000 jobs. Other sectors seeing modest gains included leisure and hospitality, education and health services, and other services. However, several sectors reported net losses, including professional and business services, information, and manufacturing.

Geographically, the South led job gains with 55,000 new positions, while the Midwest added just 17,000 jobs. Notably, companies with fewer than 50 employees reported a loss of 7,000 jobs, highlighting potential challenges for small businesses.

This ADP report comes ahead of the Bureau of Labor Statistics’ nonfarm payrolls report, due to be released two days later. While these reports can differ significantly, they both contribute to painting a picture of the overall employment situation in the United States.

The slowdown in both job and wage growth could have implications for the Federal Reserve’s monetary policy decisions. With inflation concerns still at the forefront, these trends might influence the Fed’s approach to interest rates in the coming months.

Additionally, the Labor Department reported that the employment cost index, a key indicator watched by Fed officials, increased by only 0.9% in the second quarter. This figure, below the previous quarter’s 1.2% and the expected 1% increase, provides further evidence of cooling labor market pressures.

As the economy continues to navigate post-pandemic recovery and inflationary pressures, these employment trends will be closely watched by policymakers, businesses, and investors alike. The interplay between job growth, wage increases, and inflation will likely remain a critical factor in shaping economic policy and market expectations in the months ahead.

Fed Signals Potential September Rate Cut as Inflation Steadies

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Core PCE Index rose 2.6% year-over-year in June, unchanged from May.
– Three-month annualized inflation rate fell to 2.3% from 2.9%.
– Economists anticipate the Fed may signal a September rate cut at next week’s meeting.

The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) Index, showed signs of stabilization in June, potentially paving the way for a rate cut in September. This development has caught the attention of economists and market watchers alike, as it could mark a significant shift in the Fed’s monetary policy.

According to the latest data, the core PCE Index, which excludes volatile food and energy prices, rose 2.6% year-over-year in June. While this figure slightly exceeded economists’ expectations, it remained unchanged from the previous month and represented the slowest annual increase in over three years. More importantly, the three-month annualized rate declined to 2.3% from 2.9%, indicating progress towards the Fed’s 2% inflation target.

Economists are divided on the implications of this data. Wilmer Stith, a bond portfolio manager at Wilmington Trust, believes that this reinforces the likelihood of no rate movement in July and sets the stage for a potential rate cut in September. Gregory Daco, chief economist at EY, anticipates a lively debate among policymakers about signaling a September rate cut.

However, the path forward is not without challenges. Scott Helfstein, head of investment strategy at Global X ETFs, cautioned that while the current outcome is nearly ideal, modestly accelerating inflation could still put the anticipated September rate cut in question.

The Fed’s upcoming policy meeting on July 30-31 is expected to be a crucial event. While traders widely anticipate the central bank to hold steady next week, there’s growing speculation about a potential rate cut in September. Luke Tilley, chief economist at Wilmington Trust, suggests that while the data supports a July cut, the Fed may prefer to avoid surprising the markets.

Fed Chair Jerome Powell’s recent comments have added weight to the possibility of a rate cut. In a testimony to US lawmakers, Powell noted that recent inflation numbers have shown “modest further progress” and that additional positive data would strengthen confidence in inflation moving sustainably toward the 2% target.

Other Fed officials have echoed this sentiment. Fed Governor Chris Waller suggested that disappointing inflation data from the first quarter may have been an “aberration,” and the Fed is getting closer to a point where a policy rate cut could be warranted.

As the Fed enters its blackout period ahead of the policy meeting, market participants are left to speculate on how officials might interpret the latest PCE data. The steady inflation reading provides the Fed with more time to examine July and August data before making a decision on a September rate cut.

The upcoming Fed meeting will be closely watched for any signals about future rate movements. While a July rate cut seems unlikely, the focus will be on any language that might hint at a September adjustment. As Bill Adams, chief economist for Comerica, noted, the June PCE report is consistent with the Fed holding rates steady next week but potentially making a first rate cut in September.

As the economic landscape continues to evolve, the Fed’s decision-making process remains under intense scrutiny. The balance between controlling inflation and supporting economic growth will undoubtedly be at the forefront of discussions as policymakers navigate these uncertain waters. The coming months will be crucial in determining whether the Fed’s cautious approach to rate cuts will be validated by continued progress in taming inflation.

Fed’s Cautious Approach: Two Rate Cuts Expected in 2024 Despite Market Optimism

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Economists predict two Fed rate cuts in 2024, less than market expectations
– Resilient consumer demand and strong labor market support a cautious approach
– Inflation easing but not expected to reach 2% target until at least 2026

In a recent Reuters poll, economists have outlined a more conservative outlook for Federal Reserve interest rate cuts compared to current market expectations. While financial markets are pricing in two to three rate reductions this year, a growing majority of economists anticipate only two cuts, scheduled for September and December 2024. This cautious stance reflects the complex interplay between easing inflation, robust consumer spending, and a resilient labor market.

The survey, conducted from July 17-23, revealed that over 80% of the 100 economists polled expect the first 25-basis-point cut to occur in September. This would bring the federal funds rate to the 5.00%-5.25% range. Nearly three-quarters of respondents predicted a second cut in December, maintaining this view for the past four months despite shifting market sentiments.

The rationale behind this conservative approach lies in the unexpected strength of the U.S. economy. June’s retail sales data surpassed expectations, indicating that consumer spending remains a powerful economic driver. Additionally, the unemployment rate, currently at 4.1%, is not projected to rise significantly. These factors suggest that the economy may not require as much monetary policy support as previously thought.

Inflation, while decelerating, continues to be a concern for policymakers. The personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge, is expected to show only a slight decline to 2.5% in June from 2.6% in May. More importantly, economists don’t foresee inflation reaching the Fed’s 2% target until at least 2026, underscoring the persistent nature of price pressures.

The divergence between economist predictions and market expectations has notable implications. Recent market movements have seen stocks rise by around 2% and yields on 10-year Treasury notes fall by more than 25 basis points this month, reflecting optimism about potential rate cuts. However, the more measured outlook from economists suggests that market participants may need to temper their expectations.

Looking ahead, the Fed’s decision-making process will be heavily influenced by upcoming economic data. This week’s releases, including the second-quarter GDP growth rate and June’s PCE price index, will be crucial in shaping the economic landscape. Economists project Q2 GDP growth at an annualized rate of 2.0%, up from 1.4% in Q1, indicating continued economic expansion.

The long-term outlook suggests a gradual easing of monetary policy. Economists anticipate one rate cut per quarter through 2025, potentially bringing the federal funds rate to the 3.75%-4.00% range by the end of that year. This measured approach aligns with the Fed’s dual mandate of maintaining price stability and maximum employment.

It’s worth noting that the U.S. economy is expected to grow by 2.3% in 2024, surpassing the Fed’s estimated non-inflationary growth rate of 1.8%. This robust growth projection further supports the case for a cautious approach to rate cuts.

In conclusion, while the Federal Reserve has made progress in its fight against inflation, the path forward remains complex. The resilience of the U.S. consumer and labor market, coupled with stubborn inflationary pressures, necessitates a balanced approach to monetary policy. As we move through 2024, market participants and policymakers alike will need to closely monitor economic indicators to gauge the appropriate pace of monetary easing.

Oil Prices Surge Amid Hopes for Rate Cuts and Inflation Data

Posted on by slightbourne@noblecapitalmarkets.com

In a surprising turn of events, oil prices have climbed for the second consecutive session, with Brent crude settling above $85 per barrel. This uptick comes as hopes for U.S. interest rate cuts were fueled by an unexpected slowdown in inflation. The market’s reaction to these economic indicators highlights the intricate connections between macroeconomic factors and commodity prices.

The latest data from the U.S. Bureau of Labor Statistics revealed a decline in consumer prices for June. This unexpected drop has boosted expectations that the Federal Reserve might cut interest rates sooner than anticipated. Following the release of the inflation data, traders saw an 89% chance of a rate cut in September, up from 73% the day before. Slowing inflation and potential rate cuts are expected to spur more economic activity. Analysts from Growmark Energy have noted that such measures could bolster economic growth, subsequently increasing demand for oil.

Federal Reserve Chair Jerome Powell acknowledged the recent improvements in price pressures but stressed to lawmakers that more data is needed to justify interest rate cuts. His cautious approach underscores the Fed’s commitment to data-driven policy decisions. The possibility of rate cuts also impacted the U.S. dollar index, causing it to drop. A weaker dollar generally supports oil prices by making dollar-denominated commodities cheaper for buyers using other currencies. Gary Cunningham, director of market research at Tradition Energy, emphasized this point, noting that a softer dollar could enhance oil demand.

The rise in oil prices also reflects broader market dynamics. On Wednesday, U.S. data showed a draw in crude stocks and strong demand for gasoline and jet fuel, ending a three-day losing streak for oil prices. Additionally, front-month U.S. crude futures recorded their steepest premium to the next-month contract since April. This market structure, known as backwardation, indicates supply tightness. When market participants are willing to pay a premium for earlier delivery dates, it often signals that current supply isn’t meeting demand.

While current market conditions suggest strong demand, future demand forecasts from major industry players show significant divergence. The International Energy Agency (IEA) recently predicted global oil demand growth to slow to under a million barrels per day (bpd) this year and next, mainly due to reduced consumption in China. In contrast, the Organization of the Petroleum Exporting Countries (OPEC) maintained a more optimistic outlook, forecasting world oil demand growth at 2.25 million bpd this year and 1.85 million bpd next year. This discrepancy between the IEA and OPEC forecasts is partly due to differing views on the pace of the global transition to cleaner fuels.

Alex Hodes, an analyst at StoneX, noted that the divergence in demand forecasts is unusually wide, attributing it to varying opinions on how quickly the world will shift to cleaner energy sources. This uncertainty adds another layer of complexity to market predictions and planning.

The interplay between inflation data, interest rate expectations, and oil demand forecasts creates a nuanced picture for the future of oil prices. If the Federal Reserve proceeds with rate cuts, increased economic activity could boost oil demand. However, the ongoing transition to clean energy and geopolitical factors will continue to play crucial roles. For now, market participants and analysts will closely monitor economic indicators and policy decisions. The recent rise in oil prices highlights the market’s sensitivity to macroeconomic trends and the importance of timely and accurate data in shaping market expectations.

These recent movements in oil prices underscore the complex interdependencies between economic data, policy decisions, and market dynamics. As inflation shows signs of cooling and hopes for rate cuts grow, the oil market is poised for potentially significant shifts. Understanding these trends is crucial for stakeholders across the industry as they navigate the evolving landscape of global energy markets.

Inflation Declines in June for First Time Since 2020 as Consumer Prices Ease

Posted on by slightbourne@noblecapitalmarkets.com

In a significant turn of events, the latest data from the Bureau of Labor Statistics (BLS) revealed that inflation cooled in June, marking the first monthly decline since 2020. The Consumer Price Index (CPI) fell by 0.1% compared to the previous month, with a year-over-year increase of just 3%, down from May’s 3.3% annual rise. This data beat economists’ expectations of a 0.1% monthly increase and a 3.1% annual gain.

The June CPI report is notable for being the first instance since May 2020 that the monthly headline CPI turned negative. Additionally, the 3% annual gain represents the slowest rate of increase since March 2021.

When excluding volatile food and gas prices, the “core” CPI showed a modest increase of 0.1% from the previous month and a 3.3% rise over the past year. These figures also came in below expectations, as economists had anticipated a 0.2% monthly increase and a 3.4% annual gain. This marks the smallest month-over-month increase in core prices since August 2021.

In response to the report, markets opened on a positive note. The yield on the 10-year Treasury note fell by approximately 10 basis points, trading around 4.2%.

Despite the positive signs, inflation remains above the Federal Reserve’s 2% annual target. However, recent economic data suggests that the central bank might consider rate cuts sooner rather than later. Following the release of the June inflation data, market analysts estimated an 89% likelihood that the Federal Reserve would begin cutting rates at its September meeting, up from 75% the previous day, according to CME Group data.

The broader economic context includes a robust labor market report from the BLS, which indicated that 206,000 nonfarm payroll jobs were added in June, surpassing the forecast of 190,000 jobs. However, the unemployment rate edged up to 4.1%, its highest level in nearly three years.

The Fed’s preferred inflation measure, the core Personal Consumption Expenditures (PCE) price index, showed a year-over-year increase of 2.6% in May, the smallest annual gain in over three years, aligning with expectations.

Ryan Sweet, Chief US Economist at Oxford Economics, noted that while the drop in CPI between May and June bolsters the argument for rate cuts, it should be interpreted cautiously. He emphasized that this single-month decline does not necessarily indicate a lasting trend.

Seema Shah, Chief Global Strategist at Principal Asset Management, echoed this sentiment, suggesting that while the current figures set the stage for a potential rate cut in September, a cut in July remains unlikely. Shah pointed out that such a premature move could raise concerns about the Fed’s insider knowledge on the economy, and more evidence is needed to confirm a sustained downward trajectory in inflation.

In the breakdown of the CPI components, the shelter index, a significant contributor to core inflation, showed signs of easing. It increased by 5.2% on an annual basis, down from May’s rate, and rose by 0.2% month-over-month. This was the smallest increase in rent and owners’ equivalent rent indexes since August 2021. Additionally, lodging away from home decreased by 2% in June.

Energy prices continued their downward trend, with the index dropping 2% from May to June, primarily driven by a notable 3.8% decline in gas prices. On an annual basis, energy prices were up 1%.

Food prices, however, remained a sticky point for inflation, increasing by 2.2% over the past year and 0.2% from May to June. The index for food at home rose by 0.1% month-over-month, while food away from home saw a 0.4% increase.

Other categories such as motor vehicle insurance, household furnishings and operations, medical care, and personal care saw price increases. Conversely, airline fares, used cars and trucks, and communication costs decreased over the month.

As inflation shows signs of cooling, the economic outlook suggests potential shifts in Federal Reserve policy, with market participants keenly watching upcoming data to gauge the next steps in monetary policy.