Despite the extraordinary cycle of shocking world news that has come seemingly every day this December, the capital markets have been relatively stable as investors and traders continued with a laser focus on whether the Federal Reserve would cut interest rates later this month. Specifically, close attention has been paid to the employment report and the inflation report for November.
With the distraction of the contentious Presidential campaign finally behind us, traders and investors have refocused on what policies the new President will pursue. The expectation had been that the final vote tally would take days, if not weeks to be announced. Instead, it was announced early the next morning that Donald Trump would be making a second appearance as POTUS. The capital markets have interpreted the results as good news, with S&P 500 index punching through 6,000 and the U.S. dollar reversing the swoon it had been in since May of this year. The irony is that the yield curve flattened, with short maturities rising in yield. The yield-to-maturity of the 2-year note has risen 75 basis points from the low despite the 75 basis points of overnight rate cuts in the last two months. Trump has vowed to energize the economy with the double edge sword of economic stimulus and regulatory rollback.
The narrative as we closed out the third quarter was that the economy had weakened enough that the Federal Reserve would need to trim the overnight lending rate by an additional 50 basis points this year and that rate cuts would continue through next year, with the ultimate target of getting to 3%.
September started off with a bang in terms of corporate new issuance with the four-day issuance totaling approximately $85 billion. The Treasury buying continued as well, with the entire yield curve, save the unloved 20-year note, all trading below 4.00%.
With the unusually hot (for the Northeast) weather, a most satisfying Olympics games, and the last of the days in the Hamptons behind us, now seems a good time to put together a road map of where we think the markets will be at the end of this year. Compared to years past, the last four months of 2024 seem particularly fraught with wild cards.
Investors reacted to slowing economic data last month by taking interest rates materially lower. For July, the 2-year note closed the month 50 basis-points lower at 4.25%, and the 30-year bond closed 26 basis-points lower at 4.30%. Capping what has been a string of weak employment reports, the non-farm payroll measure for July showed the economy added 114,000 new jobs for the month, well below the 178,000 expected. Most alarming though was the unemployment rate, which rose to 4.3% in July. That’s 0.8% higher than the rate registered last summer and to some, a harbinger of a recession lurking just around the corner. We don’t share that concern, but the weak employment data paired with Chairman Powell’s words have made a September rate cut a foregone conclusion.
We had two closely watched events this week, the FOMC rate decision and the monthly employment report, and neither disappointed in terms of market impact. As was widely expected, the FOMC left the overnight interest rate unchanged, with Chairman Powell strongly suggesting that a rate cut would be coming at the September meeting. Throughout his post-meeting press conference, he emphasized the Fed’s dual mandate of full employment and stable inflation. We interpret that as a concern that the employment backdrop has become a worry. The employment measures this week validated that concern.
The data this week was decidedly mixed – although the Bond market priced in further cuts. The Philadelphia non-manufacturing index plunged to -19.1 from the 2.9 recorded last month. Similarly, the Richmond Fed manufacturing index dropped to -17 from the -10 recorded last month. As expected, there was no joy to be found in the housing sector as existing and new home sales were both down for the month.
There was a host of Fed speakers this week including Chair Powell before the Economic Club of Washington DC. All of them reiterated the Chairman’s testimony before congress last week that they are pleased with the cooling inflation and somewhat concerned about the jobs market. Powell added that “he’s very happy doing the job” of Fed chair and that he’ll stay in office until his term ends in May 2026.
The highlight of the week was FOMC Chairman Powell’s dovish testimony on Capitol Hill. In describing the dual mandate of stable jobs and low inflation he said inflation has shown “modest further progress” and that labor markets had cooled “considerably.” We interpret that as meaning that a rate cut has once again been moved to the front burner of the FOMC’s agenda.