Tuesday, September 17, 2024

Markets were largely flat while traders wait for Fed decision

Dow finished down 15 after after rising in the AM, advancers over decliners 3-2 & NAZ edged up 35.  The MLP index was flat, staying near 289 & the REIT index fell 2 to the 441s.  Junk bond funds remained up a smidgen & Treasuries continue to see selling which raised yields.  Oil had a modest gain near 71 & gold pulled back 10 to 2598 (more on both below).

Dow Jones Industrials 

With considerable uncertainty about what the Federal Reserve will do at its meeting this week, respondents to a survey forecasting a more gradual approach to rate cuts than is currently priced into markets.  The survey shows 84% of the 27 respondents, including economists, fund managers & strategists, see the Fed cutting by a qtr percentage point, with 16% seeing a ½-point decrease.  That compares with 65% probability of a ½-point cut now priced into fed futures markets.  The differences grow over time with survey respondents forecasting a year-end funds rate of 4.6% & 3.7% by the end of 2025, compared with 4.1% & 2.8% in the futures market.  “We believe that the equivalent of eight cuts in six meetings is more than what will happen,″ John Donaldson, director of fixed income at the Haverford Trust, wrote in response to the survey.  “That forecast is more in line with a hard landing than a soft landing.”  Barry Knapp from Ironsides Macroeconomics says, “We suspect the FOMC will either under-promise or under-deliver, perhaps both.”  The survey stands on 1 side of a debate that has divided markets in the past several days over whether the Fed cuts 25 or 50 basis points, creating an unusual amount of uncertainty for a Fed that has telegraphed its moved at almost every meeting.  The major difference could be that survey respondents appear less worried about the economy overall than futures markets & more convinced the Fed has time to enact gradual rate cuts.  74% rate cut comes in time to preserve a soft landing, with just 15% saying it's too late.  Overall, the probability of a soft landing stands at 53%, about where it’s been since Mar, while the chance of a recession has ticked up to 36%, 5 points above its recent low in Jun, but well below the 50% level that prevailed for much of 2022 & 2023.  The outlook for growth remained at 2% for this year & ticked down to 1.7% for 2025, 2-tenths below the Jul survey, but still at or around economic potential & not a recession.  Not everyone believes the Fed has time.  “Powell’s legacy is dependent on him nailing a soft landing after waiting too late to raise rate in 2021,” said Diane Swonk, chief economist at KPMG US.  “The window on that occurring is narrowing.”  Neil Dutta of Renaissance Macro Research rejects the criticism that a ½-point cut would spook markets, saying there are real risks if the Fed only goes a qtr point.  Equity valuations are believed to be roughly in line for a soft landing with 50% saying they are overpriced & 47% saying they are underpriced.  But 97% say they are significantly or somewhat overpriced for a recessionary outcome.  “The economy is growing faster than expected in 2024, and the Fed has time to lower rates at a measured pace,” said Michael Englund of Action Economics.  “While there are economic risks on the horizon, the coming Fed cuts will be much closer to a ‘mid-cycle correction’ trend, a la 1995, 1997, & 2019, than to an end of cycle recessionary trend,″ wrote Guy LeBas, chief fixed income strategist, Janney Montgomery Scott.  Forecasts for the unemployment rate did tick modestly higher.  Compared with the current rate of 4.2%, unemployment is seen at 4.4% & 4.5% for this year and next, both about 2-tenths higher than the prior survey.

Fed to cut rates by a quarter point with a soft landing expected, according to CNBC Fed Survey

To cut or not to cut: that’s what the Federal Reserve will begin to debate at its highly-anticipated meeting.  However, 2 economists have sent a warning notice to the central bank, cautioning they're analyzing the wrong headline numbers.  "I think inflation is higher than what people are saying," former Federal Reserve Bank of Kansas City Pres said ahead of the meeting.  "If you use the CPI, which I think you should use, core [CPI] is still above three [percent], it's been above three for a year. So they ought to be cautious in coming down, as anxious as they are to please the markets and whomever else," he continued.  "They should be much more careful because, as someone said, reversing themselves now would be a disaster. Thank God they had to raise it later. It'd be a mess."  MacroMavens' matriarch economist & Pres Stephanie Pomboy agreed: "I think this is so important, the headline CPI numbers are sort of the ones to watch, and they're not particularly friendly for the Fed given the recent trend."  "Since Biden became president and the inflation numbers really took off in the beginning of 2021, the CPI was up 20%. Gold was up 30%," she further explained.  "Just here in 2024, the CPI is up 1.6% and gold is up 20%. So either the CPI is vastly understating inflation, or gold is telling us that there's a lot more inflation coming."  After its last policy meeting in Jul, the Fed kept its benchmark federal funds rate steady at a 23-year-high of 5.25 - 5.50% but opened the door to interest rate cuts if inflation continued to ease.  Inflation data showed that price growth slowed to 2.9% year over year in Jul & last week's release of Aug data reflected a continuation of that trend, with headline inflation at 2.5% from a year ago.  Fed Chair Jerome Powell has signaled that the Fed doesn't need to wait for inflation to reach the central bank's target rate of 2%, given the progress in slowing inflation, which peaked at 9.1% in 2022.  Markets expect the Fed to kick off a series of interest rate cuts this week that will continue in the months ahead, though there is debate over the size of the initial rate cut.  "Real rates are still restrictive. If they move a quarter point, I don't think it necessarily is in the world because there'll still be a constraint on the economy, but I think getting into this 50 basis point and 75 basis point discussion is really unwise," Hoenig added.  "And if they take that up, I think that's their mistake… if they go 25 basis points, which I still think is the most likely, he will then say: we're willing to do more if necessary."

US economists send Fed warning on price increases ahead of anticipated rate decision: ‘Be cautious’

US retail sales unexpectedly rose in Aug as a decline in receipts at auto dealerships was more than offset by strength in online purchases, suggesting that the economy remained on solid footing thru much of the 3rd qtr.  The report from the Commerce Dept also showed retail sales were a bit stronger than initially thought in Jul.  It combined with the decline in the unemployment rate last month to push against financial market expectations for a ½-percentage-point interest rate cut from the Federal Reserve tomorrow.  The central bank officials started a 2-day policy meeting.  The Atlanta Fed raised its 3rd-qtr GDP growth estimate to a 3.0% annualized rate from a 2.5% pace after the data.  The economy grew at a 3.0% pace in the 2nd qtr.  Retail sales increased 0.1% last month after an upwardly revised 1.1% surge in Jul, the Commerce Dept's Census Bureau said.  The forecast called for retail sales, which are mostly goods & are not adjusted for inflation, falling 0.2% after a previously reported 1.0% jump in Jul.  Estimates were from a 0.6% decline to a 0.6% gain.  Retail sales increased 2.1% on a year-on-year basis in Aug.  Online store sales rebounded 1.4% after falling 0.4% in Jul.  Sales at gasoline stations dropped 1.2%, reflecting lower prices at the pump.  Cheaper gasoline is likely freeing money for other spending.

US retail sales unexpectedly rise in August

Gold eased slightly today after climbing to an all-time high in the previous session as $ & Treasury yields edged higher, while traders positioned themselves for a potential US interest rate cut decision by the Federal Reserve this week.  Spot gold fell 0.2% to $2577 per ounce after scaling an all-time high of $2589 yesterday & US gold futures eased back 0.2% at $2604.  The spotlight in the financial realm is on the Fed's 2-day policy meeting that concludes tomorrow & markets are now pricing in a 65% chance of a 50-basis-point cut versus 34% a week ago, according to the CME FedWatch tool.  The financial markets have priced in a bigger chance that the Fed will move more aggressively.  This would be the Fed's first rate cut since 2020.

Gold lingers near record as dollar, yields firm ahead of Fed verdict

Oil edged higher as a widely expected interest-rate cut by the Federal Reserve this week offset concerns about the demand outlook.  Brent traded near $73 a barrel after rising by 1.6% yesterday, while West Texas Intermediate was above $70. Opinion remains divided on the Fed's easing path, but some are wagering it will start with a ½-point cut.  Lower rates would likely provide bullish tailwinds for energy demand.  Oil has lost around 14% this qtr on China's economic slowdown & signs of plentiful supply.  Positioning of trend-following commodity trading advisers are close to their maximum short positions after a recent price slump which may ease selling pressure.  The market is torn on the size of the interest-rate cut & investors are probably covering their positions ahead of the decision, helping to keep oil prices elevated.  There are also lingering concerns about Libyan supply.  Brent for Nov settlement was 0.4% higher at $73.0 & WTI for Oct rose 0.7% to $70.56 a barrel.

Oil Climbs Ahead of Fed Decision But Demand Concerns Persist

Stocks treaded water as investors expressed uncertainty over the size of the Federal Reserve's expected rate cut, which is to be announced at the conclusion of the major policy meeting.  Investors were weighing data that showed retail sales surpassed estimates in Aug, with a focus on signs of a slowdown in consumer spending.  The reading is the last piece of data that could factor into the Fed's thinking on whether to opt for a substantial rate cut rather than a qtr-point move.

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