Markets surge after the big Fed rate cut brings optimism to investors

Dow roared ahead 522 to rise above 42K, advancers over decliners 4-1 & NAZ advanced 440.  The MLP index remained down 1 to the 286s & the REIT index held steady in the 439s.  Junk bond funds fluctuated & Treasuries continued to be sold, lifting yields.  Oil was up 1 to the high 71s & gold jumped 16 to 2613 (more on both below).

Dow Jones Industrials 

Darden Restaurants (DRI) reported weaker-than-expected quarterly earnings & revenue as sales weakened at Olive Garden & its fine dining restaurants.  “While we fell short of our expectations for the first quarter, I firmly believe in the strength of our business,” CEO Rick Cardenas said.  “I am confident in the actions all our brand teams are taking to address their guests’ needs, which do not compromise the long-term health of our business for short-term benefits.”  The company shared a number of initiatives that it's implementing to boost sales, including its first partnership with Uber, ending its resistance to 3rd-party delivery.  DRI reported fiscal first-qtr EPS of $1.74, up from of $1.59, a year earlier.  Excluding costs related to its purchase of Tex-Mex chain Chuy's, the restaurant company earned $1.75 per share.  Net sales rose 1% to $2.76B, but same-store sales declined 1.1% in the qtr.  Traffic to its restaurants fell sharply in Jul but then improved, according to CFO Raj Vennam.  Execs at other restaurant companies have also said that traffic struggled this summer, chalking it up to increased travel or diners growing even more cautious.  Olive Garden’s same-store sales shrank 2.9% in the qtr.  The chain is reviving its Never Ending Pasta Bowl later this month in the hopes of bringing back customers.  Olive Garden is running the promotion about a month earlier than usual & extending it for 3 weeks longer than last year.  Despite the gloomy qtr, DRI reiterated its full-year outlook.  For fiscal 2025, the company is forecasting EPS from continuing operations of $9.40 - $9.60 & net sales of $11.8 - $11.9B.  To date, DRI's fiscal 2nd-qtr same-store sales are growing, a promising sign that this summer's slump could just be a blip, Cardenas said.  The stock gained 13.10 (8%).

Darden Restaurants earnings disappoint as Olive Garden, fine dining sales struggle

Mortgage rates declined again this week, sparking a subtle boost in demand for purchase & refinance applications.  Still, many buyers continue to hold off on making a move while waiting for steeper cuts, as fresh data shows existing home sales eased in Aug from the month before.  Freddie Mac's latest Primary Mortgage Market Survey showed that the average rate on the benchmark 30-year fixed mortgage dropped to 6.09%, down from the 6.20% reading of the past 2 weeks & the average rate on a 30-year loan was 7.19% a year ago.  The latest drop in rates comes after the Federal Reserve cut the federal funds rate by 50 basis points, but the mortgage rate declines were due to market expectations of future cuts.  "Mortgage rates continued declining towards the six percent mark, reviving purchase and refinance demand for many consumers," said Sam Khater, Freddie Mac's chief economist.  "While mortgage rates do not directly follow moves by the Federal Reserve, this first cut in over four years will have an impact on the housing market," Khater continued.  "Declining mortgage rates over the last several weeks indicate this cut was mostly baked in, but we expect rates to fall further, sparking more housing activity."  Many would-be buyers & sellers are holding out to see if rates fall further.  Currently, about 80% of mortgage holders have a rate below 5%, according to a Zillow survey.  The average rate on the 15-year fixed mortgage declined to 5.15% from 5.27% last week.  One year ago, the rate on the 15-year fixed note averaged 6.54%

Mortgage rates fall again, but home sales still lag

Federal Reserve Chair Jerome Powell has unveiled his latest buzzword to describe monetary policy, with a “recalibration” of policy at a pivotal moment for the central bank.  Following yesterday's open market committee meeting, Powell used variations of the word no fewer than 8 times as he sought to explain why the Fed took the unusual step of a ½ percentage point rate cut absent an obvious economic weakening.  “This recalibration of our policy stance will help maintain the strength of the economy and the labor market, and will continue to enable further progress on inflation as we begin the process of moving forward a more neutral stance,” Powell said.  Financial markets weren't quite sure what to make of the chair's messaging in the meeting's immediate aftermath.  However, asset prices soared today as investors took Powell at his word that the unusually outsized move wasn't in response to a substantial slowing of the economy.  Rather, it was an opportunity to “recalibrate” Fed policy away from a rigid focus on inflation to a broader effort to make sure a recent weakening of the labor market didn't get out of hand.  Several of his previous efforts to provide buzzy descriptions of Fed policy or its views on the economy haven't worked out so well. In 2018, his characterizations of the efforts to reduce its bond holdings as being on “autopilot,” as well as his assessment that a string of rate hikes the same year had brought the Fed “a long way” from a neutral interest rate spurred blowback from markets.  More famously, his insistence that an inflation surge in 2021 would prove “transitory” ended up causing the Fed to be slow-footed on policy to the point where it had to enact a series of 3-qtr percentage point rate increases to pull down inflation.  But markets expressed confidence in Powell's latest assessment, despite this track record & some signs of cracks in the economy.

The Fed has set out on a ‘recalibration’ of policy. Here’s what Powell’s new buzzword means

Gold prices rose over 1% as the Federal Reserve launched its monetary easing cycle with a ½ percentage point move, boosting bullion to an all-time high & just pennies shy of the key $2600 ceiling in the previous session.  Spot gold rose 1.2% to $2590 per ounce & US gold futures settled 0.6% higher at $2614.  Spot prices scaled a record high of $2599 yesterday after the Fed lowered the benchmark policy rate by 50 basis points to 4.75% - 5.00%.  Fed policymakers also projected the benchmark interest rate would fall by another ½ of a percentage point by the end of this year, a full percentage point next year & ½ of a percentage point in 2026.  The market is factoring in bigger & more rate cuts because of fiscal & trade deficits, & that's going to further weaken the overall value of the $.  Bullion is considered a safe asset during political & economic uncertainty.  It also tends to thrive in a low-rate environment.

Gold Gains Over 1% as Fed Begins Deeper Rate-Cut Cycle

Oil advanced as a risk-on tone swept across wider financial markets following the steep interest-rate cut by the Federal Reserve.  Brent futures climbed toward $75 a barrel after closing little changed on yesterday, while West Texas Intermediate was above $71.  European stock futures gained alongside Asian equities as the Fed's move reinforced expectations that the US economy will avoid a downturn.  Brent is still on track for a quarterly loss on concerns over China's economic slowdown & ample supply.  A measure of US gasoline demand fell further below 9M barrels while jet fuel consumption ebbed for a 3rd straight week, according to gov data, adding to bearish headwinds.  Shrinking US inventories could underpin further price gains.  Crude stockpiles at the key storage hub at Cushing, Oklahoma, are significantly lower than the 5-year seasonal average & close to what's considered tank bottom levels, according to EIA data.  Brent for Nov rose 1.2% to $74.54 a barrel & WTI for Oct climbed 1% to $71.65 a barrel.

Oil Gains Toward $75 With Markets Rallying After Fed Cuts Rates

Stocks soared amid growing optimism that the Federal Reserve's jumbo interest rate cut will deliver a soft landing for the US economy.  Meanwhile gold is over 2600.  Risk averse (gold) & risk-on (stocks) investors are both embracing their investments at the same time.  This relationship has lasted for many months.