Dow finished down 103 (with selling in the last hour), advancers over decliners about 3-1 & NAZ was off 54. The MLP index stayed in the 288s & the REIT index was flattish at 440. Junk bond funds were mixed & Treasuries saw a little selling which lifted yields modestly. Oil slid fractionally lower but held above 70 & gold jumped 17 to 2606 (more on both below).
Dow Jones Industrials
The Federal Reserve enacted its first interest rate cut since the early days of the Covid pandemic, slicing ½ a percentage point off benchmark rates in an effort to head off a slowdown in the labor market. With both the jobs picture & inflation softening, the Federal Open Market Committee (FOMC) chose to lower its key overnight borrowing rate by a ½ percentage point, 50 basis points, affirming market expectations that had recently shifted from an outlook for a cut ½ that size. Outside of the emergency rate cuts during Covid, the last time the FOMC cut by ½ a point was in 2008 during the global financial crisis. The decision lowers the federal funds rate to 4.75%-5.00%. While the rate sets short-term borrowing costs for banks, it spills over into multiple consumer products such as mortgages, auto loans ½ credit cards. In addition, the committee indicated thru its “dot plot” the equivalent of 50 more basis points cut by the end of the year, close to market pricing. The matrix of individual officials' expectations pointed to another full percentage point in cuts by the end of 2025 & a ½-point in 2026. In all, the dot plot shows the benchmark rate coming down about 2 percentage points beyond today's move. “The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance,” the post-meeting statement said. The decision to ease came “in light of progress on inflation and the balance of risks.” The FOMC vote came by an 11-1 vote, with Governor Michelle Bowman preferring a qtr-point move. Trading was volatile after the decision with the Dow jumping as much as 375 points, before easing somewhat as investors digested the news & what it suggests about the state of the economy. In assessing the state of the economy, the committee judged that “job gains have slowed and the unemployment rate has moved up but remains low.” FOMC officials raised their expected unemployment rate this year to 4.4%, from the 4% projection at the last update in Jun & lowered the inflation outlook to 2.3% from 2.6% previous. On core inflation, the committee took down its projection to 2.6%, a 0.2 percentage point reduction from Jun. The committee expects the long-run neutral rate to be around 2.9%, a level that has drifted higher as the Fed has struggled to get inflation down to 2%. The decision comes despite most economic indicators looking fairly solid. Gross domestic product has been rising steadily, & the Atlanta Fed is tracking 3% growth in the 3rd qtr based on continuing strength in consumer spending. Moreover, the Fed chose to cut even though most gauges indicate inflation well ahead of the central bank’s 2% target. The Fed's preferred measure shows inflation running around 2.5%, well below its peak but still higher than policymakers would like. However, Powell & other policymakers in recent days have expressed concern about the labor market. While layoffs have shown little sign of rebounding, hiring has slowed significantly. The last time the monthly hiring rate was this low, 3.5% as a share of the labor force, the unemployment rate was above 6%. At his press conference following the Jul meeting, Powell remarked that a 50 basis point cut was “not something we’re thinking about right now.” For the moment, at least, the move helps settle a contentious debate over how forceful the Fed should have been with the initial move.
Fed slashes interest rates by a half-point, an aggressive start to its first easing campaign in four years
Boeing (BA), a Dow stock, will temporarily furlough thousands of US execs, managers & other staff, citing the ongoing machinist strike as the company races to preserve cash, CEO Kelly Ortberg told employees. The furloughs will affect 10s of thousands of its employees. The plan came less than a week after its more than 30K machinists in the Seattle area & Oregon overwhelmingly voted down a new labor contract & 96% voted to strike, walking off the job just after midnight on Fri. Negotiations
between the 2 sides continued this week with a mediator. BA had
offered a 25% raise & the union endorsed the tentative contract. But
some workers said that the contract offer was rejected because the
raises weren't sufficient enough to match the increase in the cost of
living in the Seattle area & it didn't restore their pensions. “We will not mince words - after a full day of mediation, we are frustrated,” the union said. Ortberg, who has been in the job
for just under 6 weeks, said in a staff memo that affected employees
would take 1 week of furlough every 4 weeks for the strike's
duration & he & his team would take “commensurate” pay cuts during
the strike. “While this is a tough decision that impacts
everybody, it is in an effort to preserve our long-term future and help
us navigate through this very difficult time. We will continue to
transparently communicate as this dynamic situation evolves and do all
we can to limit this hardship,” Ortberg added. The financial impact of the strike will depend how long it lasts, but it adds to pressure on BA's leaders, who are trying
to move the company past safety & quality crises, including the
fallout from a near-catastrophic door plug blowout in Jan & $60B in debt. Ortberg said that “activities critical to our
safety, quality, customer support and key certification programs will be
prioritized and continue” including production of its 787 Dreamliners,
which are made in a nonunion facility in South Carolina. The stock fell 1.22.
Boeing starts furloughing tens of thousands of employees amid machinist strike
Rep House Speaker Mike Johnson said former Pres Trump could pay for his presidential campaign's economic proposals by rolling back corp regulation & expanding tax cuts to stimulate growth. “You have to bring about a pro-growth economy, and you do that with a combination of aggressive use of the tax code and reduction in government regulation,” he said. “If you get Republican leadership in the White House, the Senate and the House, unified government, we will put this thing on turbo. You will see massive regulatory reform,” he continued. Trump has proposed making his 2017 tax cuts permanent & further lowering the corp tax rate, as well as wholly eliminating federal income taxes on worker tips, overtime pay & Social Security benefits. An Aug study from the nonpartisan Penn Wharton Budget Model found that Trump's policy proposals could add an estimated $5.8T to the federal deficit over the next 10 years. That figure did not include Trump's Sep 12 proposal to exempt overtime pay from federal income taxes. If applied only to pay that is currently designated as overtime, the proposal would add an estimated $866B to the total cost of Trump's proposals over the next decade, according to an analysis from the Yale Budget Lab. A tax exemption for all hours worked over 40 hours per week would cost an estimated $1.3T over 10 years. Yesterday, the Rep presidential nominee also floated reestablishing the state & local tax (SALT) deduction, which he capped during his first term. Johnson agreed with all of Trump's proposals. Paying for them, he said, would come down to a combination of corp tax cuts, deregulation & energy policy to get “the economy humming.” Trump, however, has repeatedly said he wants to pay for his plans with the proceeds from hardline tariffs on all imports, with an especially high rate for Chinese imports. During his debate against VP Kamala Harris last Tues, Trump touted the “billions and billions of dollars” in revenue generated by his first-term tariffs, which nearly triggered a trade war with China.
House speaker floats deregulation, tax cuts — not tariffs — to pay for Trump plan
Gold prices rose to an all-time high after the Federal Reserve cut interest rates by 50 basis points, sending the $ lower. Spot gold was up 0.9% at $2592 per ounce & US gold futures settled 0.2% higher at $2598. The central bank kicked off what is expected to be a steady easing of monetary policy with ½ a percentage point cut. Policymakers see the Fed's benchmark rate falling by another ½ of a percentage point by the end of this year & another full percentage point in 2025. Lower interest rates decrease the opportunity cost of holding non-yielding bullion & weigh on the $, making gold cheaper for investors holding other currencies. Following the Fed's cut, the $ fell 0.5% - to its lowest since Jul 2023 against its rivals. Investors now look forward to comments from Chair Jerome Powell for more cues on policy path.
Gold Jumps to Record High After U.S. Fed Delivers 50 Bps Rate Cut
Oil prices closed slightly lower, snapping a 2-day winning streak even after the Federal Reserve cut interest rates for the first time in years. The central bank slashed rates by a ½ point, a bigger move than many had expected. Though prices clawed back losses from earlier in the session, the response in the oil market was subdued. West Texas Intermediate Oct contract settled at $70.91 per barrel, down 28¢ (0.4%) & YTD US crude oil has fallen about 1%. Brent Nov contract $73.65 per barrel, down 5¢ & YTD, the global benchmark has declined about 4%. The oil market has been rattled this month by worries about a growing imbalance between supply & demand. US crude & global benchmark Brent have fallen about 13% in the 3rd qtr. Consumption in China is slowing as electric vehicle sales surge in the world's largest crude importer. At the same time, OPEC+ is expected to increase production in Dec as output in the US, Canada, Brazil & Guyana remains strong. US commercial crude stockpiles fell by 1.6M barrels last week, according to the Energy Information Administration.
Oil Prices Close Slightly Lower After Fed Cuts Interest Rates for First Time in Years
The stock market settled lower in choppy trading after the Federal Reserve cut interest rates by 0.5% in its first rate reduction since 2020. Additionally, the Fed's latest Summary of Economic Projections (SEP) showed the majority of Fed officials expect the central bank to cut interest rates by 100 basis points in total this year. The significant policy shift was widely expected, given growing signs
that the central bank has managed to cool inflation without severe harm
to the economy. But investors were still guessing at whether hopes for a
0.5% cut would be fulfilled or if the historic pattern of 0.25% moves
would repeat itself. The BA strike will be a drag on the economy as long as it lasts.
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