Dear Friends,
Federal Reserve Chair Jerome Powell said last month’s decision to cut the fed funds target rate by a half percentage point was due to a “recalibrating” policy, as the Fed follows its dual mandate regarding inflation and growth.
The new buzzword — recalibration — implies mechanical fine-tuning, but unfortunately, the macro economy is not that robotic. It consists of emotional people with ever-changing needs and wants. However, the buzzword also evokes something therapeutic; that is, the Fed is not cutting rates because of an imminent recession. In fact, the economy may grow above trend for yet another quarter or two. Still, questions remain for 2025.
Find out more about what is driving the markets in this week’s newsletter.
Economy, Geopolitics, and Commodities
1. Federal Reserve May Have Pretty Much Hit Its 2% Inflation Target
This week’s inflation data provided more evidence that the Federal Reserve is nearing its objective, fresh on the heels of the central bank’s dramatic interest rate cut just a few weeks ago. Consumer and producer price indexes for September both came in around expectations, showing that inflation is drifting down to the central bank’s 2% target.
In fact, economists at Goldman Sachs think the Fed may already be there. The Wall Street investment bank Friday projected that the Commerce Department’s personal consumption expenditures price index for September will show a 12-month inflation rate of 2.04% when it is released later this month. If Goldman is correct, that number would get rounded down to 2% and be right in line with the Fed’s long-held objective, a little over two years after inflation spiked to a 40-year high and unleashed an aggressive round of interest rate hikes. The Fed prefers the PCE as its inflation gauge though it uses a variety of inputs to make decisions.
“The overall trend over 12, 18 months is clearly that inflation has come down a lot, and the job market has cooled to a level which is around where we think full employment is,” Chicago Fed President Austan Goolsbee said in a CNBC interview Thursday after the latest consumer price data was released. “We’d like to get both of them to stay in the space where they are right now.”
While keeping inflation at bay may not be an easy task, the latest data indicates that though prices are not receding from their troublesome heights of a few years ago, the rate at which they are increasing is pulling back. The 12-month rate for the all-items consumer price index was at 2.4% in September, while the producer price index, a proxy for wholesale inflation and a leading gauge for pipeline pressures, showed an annual rate of 1.8%. Goldman’s projection that the PCE index is heading to 2% is also about in line with tracking from the Cleveland Fed.3
2. Strong September Jobs Report Sets Stage for Smaller Fed Rate Cut
Hiring in September proved far stronger than economists expected, making it more likely that the Federal Reserve will opt for a smaller interest rate cut in November than had been anticipated just a few weeks ago.
The US economy added 254,000 jobs in September, according to the latest Bureau of Labor Statistics report, which also revised up previous estimates for new job creation in August and July. Meanwhile, the unemployment rate ticked down to 4.1% in September from 4.2% in August.
Economists forecast the economy would add 140,000 jobs in September, which would have been little change from the originally reported increase for August. Meanwhile, the unemployment rate was forecast to remain unchanged at 4.2%.
The September jobs report “means the Fed is almost certain to cut by 25 basis points rather than make another 50-basis point cut at its next meeting,” says Preston Caldwell, senior US economist at Morningstar. “Overall, the report takes some of the edge off the jobs data, which had previously shown an alarming uptick in unemployment and decelerating nonfarm payroll employment growth. We’re unsurprised that the jobs data has veered in a more positive direction. As we commented with previous months’ reports, it would be surprising for the labor market to lurch off a cliff even while economic activity grew robustly. Almost always, the labor market is a lagging indicator.” 2
3. Trouble at the Docks
For the first time since 1977, members of the International Longshoremen’s Association (ILA) went on strike, putting a wrinkle in the Fed’s best-laid plans to ease policy rates without instigating a resurgence of inflation. Thankfully, the strike only lasted three days, but the effects could linger. The ILA agreed on October 3 to extend their contract that had expired on September 30 until mid-January, setting the economy up for another potential conflict next year.
The recent longshoreman strike affected 40 ports to various degrees across the country, and if it had lasted a week, some estimated it would have cost over $2 billion in lost business. In a separate dispute, the Boeing machinist strike has lasted three weeks so far, costing the economy over $1 billion and adding to the fragilities of the market. Although only a few days long, the port strike impacted perishable items, according to the American Farm Bureau Federation. These strikes added tension to an already-stressed supply chain, increasing input prices paid by businesses. Independent of the union drama, supply pressures had previously increased in August, so the strike’s effects could linger for a bit. According to the Institute of Supply Management, businesses reported a reacceleration of input costs before the strikes, so if supply chains tighten further by other means, consumers will eventually notice an uptick in prices.
So, what effects can investors anticipate? If supply chains become crimped for other reasons since the strike is suspended, markets will alter Fed rate expectations, businesses could experience some of the postCOVID-19 shipping constraints, and consumers would initially witness higher commodity prices before impacting other markets.5
4. Gold Extends Gains as U.S. PPI Data Solidifies Rate Cut Hopes
Gold rose on Friday after U.S. inflation data cemented prospects of rate cuts this year, restraining the dollar below recent highs, while safe-haven demand stemming from the geopolitical tensions in the Middle East also lifted bullion. Spot gold rose 1% to $2,656.09 per ounce, up for the second straight session, and U.S. gold futures gained 1.3% to $2,674.40. “The economy is still relatively strong, and the Fed is still in a paradox where they’re looking at cutting rates because some sectors have slowed down significantly, like housing,” said Daniel Pavilonis, senior market strategist at RJO Futures.
U.S. producer prices were unchanged in September, pointing to a still-favorable inflation outlook and supporting expectations of Fed rate cut next month. “The PPI numbers leaned friendly for the precious metals market bulls and suggest the Fed remains on track for two quarter-point interest rate cuts this year,” Jim Wyckoff, senior market analyst at Kitco Metals, said.
This follows data on Thursday showing U.S. consumer prices rose slightly more than expected last month, but the annual increase in inflation was the smallest in more than 3-1/2 years. “Gold is expected to reach $3,000 by 2025 due to geopolitical tensions, inflation concerns, and election uncertainties,” Pavilonis added. The dollar held below a two-month high against a basket of peers on Friday.4
5. Oil Eases Though Investors Wary Over Potential Supply Disruption
Oil eased on Friday after a rally the previous day, but prices remained set for a second straight weekly gain as investors weighed the impact of hurricane damage on U.S. demand against any broad supply disruption if Israel attacks Iranian oil sites.
Brent crude oil futures fell 39 cents, or 0.5%, to $79.01 a barrel by 0152 GMT. U.S. West Texas Intermediate crude futures dropped 32 cents, or 0.4%, to $75.53 per barrel. For the week, both benchmarks were headed for a 1%-2% gain.
In the United States, Hurricane Milton plowed into the Atlantic Ocean on Thursday after cutting a destructive path across Florida, killing at least 10 people and leaving millions without power. The destruction could dampen fuel consumption in some areas of the world’s largest oil producer and consumer. “Investors are evaluating how hurricane damage might impact the U.S. economy and fuel demand,” said Hiroyuki Kikukawa, president of NS Trading, a unit of Nissan Securities. “Oil prices are likely to hover around the current 200-day average levels, with the primary concern being whether Israel will retaliate against Iranian oil facilities,” he said. The 200-day average for Brent is at $81.68 a barrel and for WTI it’s at $77.36.
Crude benchmarks spiked this month after Iran launched more than 180 missiles against Israel on Oct. 1, raising the prospect of retaliation against Iranian oil facilities. Israel has yet to respond, and crude benchmarks have eased and remained relatively flat through the week.3
Financial Markets
1. Dow and S&P 500 Reach New Highs
The S&P 500 and Dow Jones Industrial Average powered to new highs on Friday and capped off a winning week as banking behemoths ushered in a promising start to the third-quarter earnings season. The broad index gained 0.6% to end at 5,815.03, while the Dow rallied 409.74 points, or nearly 1%, to finish at 42,863.86. The Nasdaq Composite added 0.3% to finish at 18,342.94 and less than 2% below its all-time high. “What we’re seeing — and I think you’re seeing it hit pretty hard today, in a good way — is a broadening of the market,” said Craig Sterling, head of U.S. equity research at Amundi US. The major averages also registered a fifth straight week of gains. The S&P and Nasdaq jumped 1.1% each, while the Dow toted a 1.2% gain.
A strong start to the third-quarter earnings season provided a lift to stocks. JPMorgan Chase rose 4.4% after topping profit and revenue expectations, while Wells Fargo popped 5.6% on stronger-than-expected profits. Investors overlooked disappointing revenue and an 11% decline in net interest income. Wall Street tends to view the banking sector as a barometer for the health of economy, setting the tone for the remainder of the earnings season. However, Forrest notes they lack the visibility into forward guidance that often impacts the post-earnings stock moves.
Stocks also benefitted from data that alleviated fears that inflation wasn’t cooling off quick enough. That included a cooler-than-expected September producer price index reading after the consumer price index increased slightly more than expected. The findings signaled that the Federal Reserve may in fact attain a soft landing scenario and reach its 2% goal, which Goldman Sachs economists think upcoming September inflation data may already show. Overall, these numbers are getting less impactful as inflation moderates,” said David Russell, global head of market strategy at TradeStation. “The Fed could still be on track for 25 basis points at the next two meetings.”3
2. JPMorgan Reports Better-Than-Expected Results
JPMorgan Chase on Friday said the U.S. economy remains strong for both consumers and big companies, a sign that the Federal Reserve may have achieved the much-discussed soft landing with lower inflation and healthy growth. The biggest bank in the country continued to earn more than expected on lending in the third quarter and raised forecasts of what it will earn this year, even after the Fed recently cut interest rates for the first time in four years. Executives said consumers continued to spend and big businesses are confident, the kind of economy the Fed had been hoping to engineer.
“These results are consistent with a soft landing,” Chief Financial Officer Jeremy Barnum said on a conference call. “That’s pretty consistent with this kind of Goldilocks economic situation.” The Fed’s recent interest-rate cut will take time to work its way through the banking system and most analysts expect that banks’ profits from lending should decline as they will have to lower interest charges on loans.
But JPMorgan surprised to the upside on Friday and fellow big bank Wells Fargo WFC also posted better-than-expected results. Shares of JPMorgan were up nearly 5% while Wells Fargo was up more than 6%, leading banks and financial stocks higher and helping power gains in the broader market. The bank results add to economic data that suggest the Fed is approaching the soft landing. Inflation is slowly coming closer to the Fed’s target, new job creation is strong and unemployment remains low.
However, it isn’t all good news. At JPMorgan, deposit balances shrank overall and the bank has said it expects higher loan losses from its credit-card arm, a signal that some consumers are feeling increasingly stretched. Overall, customers at Chase Bank showed that they are continuing to spend on credit cards, and balances are growing. Although expected losses from credit-card loans are going up, executives said there isn’t too much cause for worry.1
3. TD Bank Agrees to $3 Billion in Penalties and Growth Restrictions
TD Bank agreed to pay more than $3 billion in penalties and accepted limits on its growth in the U.S. as part of a settlement Thursday with regulators and prosecutors over charges it failed to properly monitor money laundering by drug cartels and other criminal groups. As part of the agreement, the bank’s primary U.S. regulator, the Office of the Comptroller of the Currency, imposed an asset cap barring the bank’s retail business from growing above its current level of assets in the U.S.
The bank’s U.S. head, Leo Salom, said the bank would reduce its $434 billion asset portfolio in the U.S. by 10%, including by selling some jumbo mortgages and auto-dealer loans, to give itself some room to continue lending money to retail and commercial clients. The sweeping rebuke shows regulators and prosecutors found the problems at TD to be severe. The OCC said TD had “significant, longstanding, systemic breakdowns in its transaction monitoring program.”
TD processed hundreds of millions of dollars worth of transactions that clearly indicated highly suspicious activity, which created “a potential for significant money laundering, terrorist financing or other illicit financial transactions,” the regulator said. For instance, TD allowed three money-laundering networks to transfer more than $670 million through TD Bank accounts between 2019 and 2023, the regulator said.
In May 2023, U.S. regulators’ concerns over the probe and TD’s ability to detect and prevent money laundering scuttled the bank’s planned $13.4 billion acquisition of Tennessee’s First Horizon, the Journal reported.1
4. Tesla’s Robotaxi Event Disappoints Investors
Shares in Tesla fell roughly 8% in morning trading following an event that was heavier on showbiz but lighter on business than investors had hoped after months of buildup. The stock decline wiped more than $50 billion off the electric-car maker’s market value.
Tesla on Thursday evening revealed a two-seat vehicle, called the Cybercab, without a steering wheel or pedals at a tightly choreographed product launch in Los Angeles. Musk, Tesla’s chief executive, arrived at the presentation in the driverless car, which piloted itself through a dark lot at Warner Bros. studios with the billionaire entrepreneur in the passenger seat. The electric-car pioneer also surprised attendees with the reveal of a Robovan, an autonomous shuttle that can transport up to 20 people at a time. Optimus robots mingled with guests, and Musk talked about plans for a new battery-charging technology that would use an inductive method, where the car would only have to drive over a pad to recharge.
Following a strategic pivot toward robotics and autonomy this year, Musk had billed the event as Tesla’s most significant since the launch of its benchmark-setting Model 3 in 2017. For investors, a move into robotaxis offers one way to justify Tesla’s $763 billion market value. After a rally in the stock in anticipation of the event, Musk’s company is worth about three times as much as Toyota, the world’s best-selling car maker.1
Sources:
(1) www.wsj.com
(2) www.morningstar.com
(3) www.cnbc.com
(4) www.reuters.com
(5) www.lpl.com
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.
Investing in stock includes numerous specific risks, including the fluctuation of dividends, loss of principal, and potential illiquidity of the investment in a falling market.
Investing in foreign and emerging market securities involves special additional risks. These risks include but are not limited to currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
Investment advice offered through Private Advisor Group, a registered investment advisor and separate entity from The Legacy Foundation.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
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