Dear Friends,
After the central bankers’ annual Jackson Hole meeting, global central banks are heading for a synchronized easing cycle after one of the most aggressive rate-tightening campaigns ever in 2022 and 2023. The most likely scenario is the Fed will cut by 25 basis points in the upcoming meeting and reserve the potential for more aggressive action later this year if the job market deteriorates further. Investors should expect interest rate volatility as the Fed adjusts policy. Find out more about what is driving the markets in this week’s newsletter.
Economy, Geopolitics, and Commodities
1. The Fed’s Rate-Cut Dilemma: Start Big or Small
Federal Reserve Chair Jerome Powell faces a difficult decision as the central bank prepares to cut interest rates next week: Start small or begin big? The central bank is set to reduce rates for the first time since 2020 at its meeting on Sept. 17-18. Because officials have signaled greater confidence that they can make multiple rate cuts over the next several months, they are confronting questions over whether to cut by a traditional 0.25 percentage point or by a larger 0.5 point. Powell kept all his options on the table in a speech last month in Jackson Hole, Wyo., that surprised some of his colleagues with its unambiguous call to turn attention to incipient risks in the jobs market. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks,” he said then.
Officials last year raised their benchmark rate to around 5.3%, a two-decade high, and will have held it at that level for the last 14 months to combat inflation, which has declined notably. They are nervous about keeping interest rates too high for too long amid evidence that higher borrowing costs are working as intended to slow inflation by cooling spending, investment and hiring. They don’t want to let slip through their grasp a soft landing, in which inflation falls without a serious jump in joblessness. Recent economic data have been mixed. Several analysts said firmer housing costs in the consumer-price index report Wednesday weakened the case to push through a larger cut next week, sending market expectations of a smaller cut to around 85%, according to CME Group. But a separate report Thursday signaled that underlying prices in the Fed’s preferred inflation gauge were likely to have been considerably milder in August, keeping the door open for the Fed to focus on preventing labor-market softening. 1
2. US Jobless Claims Pick Up for the First Time in Three Weeks
Applications for US unemployment benefits ticked up for the first time in three weeks, consistent with a gradual slowdown in hiring. Initial claims increased by 2,000 to 230,000 in the week ended Sept. 7, according to Labor Department data released Thursday. The median forecast in a Bloomberg survey of economists called for 226,000 applications. Continuing claims, a proxy for the number of people receiving benefits, also rose, to 1.85 million in the week ended Aug. 31. The claims data are prone to fluctuations around holidays, and the latest period included Labor Day. The four-week moving average, a metric that helps smooth out volatility in the data, edged up to 230,750 — the first increase in five weeks.
Despite the latest increase, the level of claims has remained subdued for several weeks. Economists have been on the lookout for any sign of a downturn in the labor market, but so far there’s been no such warning in the weekly applications for benefits. Federal Reserve officials have made it clear that further deterioration in the job market would be a major concern as they look toward lowering interest rates. With labor demand moderating and an unexpected pickup in a key gauge of underlying inflation in August, the central bank is widely expected to start its policy easing with a small-sized cut of 25 basis points at their meeting next week.2
3. Consumer Prices Rose 0.2% in August
Inflation in August declined to its lowest level since February 2021, according to a Labor Department report Wednesday that also showed a key measure higher than expected, setting the stage for an expected quarter percentage point rate cut from the Federal Reserve. The consumer price index, a broad measure of goods and services costs across the U.S. economy, increased 0.2% for the month, in line with the Dow Jones consensus, the Bureau of Labor Statistics reported.
That put the 12-month inflation rate at 2.5%, down 0.4 percentage point from the July level, slightly below the estimate for 2.6% and at its lowest level in 3½ years. However, the core CPI, which excludes volatile food and energy prices, increased 0.3% for the month, slightly higher than the 0.2% estimate. The 12-month core inflation rate held at 3.2%, in line with the forecast. The slight uptick in core CPI keeps the Fed on defense against inflation, likely negating the probability of a more aggressive interest rate when policymakers meet next Tuesday and Wednesday. Stocks slumped following the report, while Treasury yields were mixed. However, the market rebounded later in the day, recouping its losses as the major averages all turned positive. In the fed funds futures market, traders priced in an 85% chance that the Federal Open Market Committee will approve a quarter percentage point, or 25 basis point, interest rate reduction when its meeting concludes Sept. 18, according to the CME Group’s Fed Watch measure. A month ago, markets were leaning towards a 50-basis point cut.3
4. ECB Cuts Rates Again as Inflation Fades and Economy Stumbles
The European Central Bank lowered interest rates for the second time this year with inflation receding toward 2% and concerns about the economy building. The key deposit rate was cut by 25 basis points to 3.5% — as all analysts polled by Bloomberg predicted. The ECB reiterated that it can’t commit to a specific course for borrowing costs. “We shall remain data-dependent,” ECB President Christine Lagarde told reporters in Frankfurt, adding that Thursday’s decision was unanimous. “That is particularly justified in view of the uncertainty that abounds.”
Like its global peers, the ECB is getting more confident that consumer-price growth is returning to target following its historic spike. The euro zone’s 20-nation economy, meanwhile, is losing momentum. Households are failing to support the rebound that began earlier in the year and manufacturers remain in the doldrums due to soft demand from outside the single currency area. That weakness prompted the ECB to trim its forecasts for gross domestic product in 2024, 2025 and 2026 — now seeing expansion this year of 0.8% compared with 0.9% in the last round of quarterly projections. The inflation outlook was broadly unchanged. The ECB’s announcement follows a plunge in inflation to 2.2% in August and figures showing the rapid wage increases driving price gains — particularly in the services sector — are slowing. Rises in compensation per employee — a comprehensive measure of workers’ pay — eased to 4.3% in the second quarter from 4.8% in the first.2
5. Mortgage Rates Hit Lowest Level Since February 2023
Mortgage rates fell for the sixth straight week last week, but mortgage demand still seems to be waiting for something bigger. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) decreased to 6.29% from 6.43%, with points falling to 0.55 from 0.56 (including the origination fee) for loans with a 20% down payment, according to the Mortgage Bankers Association. That is the lowest level since February 2023 and nearly a full percentage point lower than the same week one year ago.
Total mortgage demand, however, rose just 1.4% for the week, according to the MBA’s seasonally adjusted index. The results also included an adjustment for the Labor Day holiday. Refinance applications only increased 1% week to week but were 106% higher than a year ago. That may sound like a massive increase, but the numbers were so low last year, that even with that large gain, refinancing is still historically low. Most of those refinancing likely bought their homes in the last two years, when rates had moved significantly higher off of record lows. Applications for a mortgage to purchase a home rose 2% for the week but were 3% lower than the same week one year ago.4
Financial Markets
1. S&P 500 and Nasdaq Rally Friday to Cap Best Week in 2024
Stocks traded higher on Friday as Wall Street headed for a strong weekly gain ahead of the upcoming Federal Reserve meeting. The S&P 500 climbed 0.6%, putting the broad-market index on track for its fifth straight winning session as it trades less than 1% from its July all-time high. The Dow Jones Industrial Average jumped 272 points, or 0.7%. Benchmark 10-year Treasury yields crept lower to 3.648%, falling for the second consecutive week. Gold prices set a fresh record, with continuous gold futures on the New York Mercantile Exchange rising 1.2% to $2581.30 a troy ounce. The tech-heavy Nasdaq Composite added about 0.7%. Utilities, materials, and industrials led the market higher on Friday, with each sector adding more than 1%.
Investors also continued to rake up shares of mega-cap tech and semiconductor names, which helped drive this week’s rebound rally after tech’s recent underperformance. Powerhouse chipmakers Super Micro Computer and ARM Holdings added 3.5% and 6.2%, respectively. Nvidia shed marginally, meanwhile. Alphabet added 1.7% and Uber jumped more than 5%.3
2. Amazon to Invest $10.5 Billion in U.K. for Cloud, AI Infrastructure
Amazon plans to spend about $10.5 billion over the next five years in cloud and artificial intelligence infrastructure in the U.K., as global tech companies boost their data-center footprints amid a boom in demand for artificial-intelligence computing. Amazon Web Services, the U.S. tech giant’s cloud-computing arm, said Wednesday that it will make an investment of 8 billion pounds, the equivalent of $10.46 billion, through 2028 to build and operate data centers in the U.K. to meet rising demand for cloud technology and services.
AWS is Amazon’s most profitable unit, and its second-quarter results showed the segment’s net sales grew about 19% from a year earlier to a higher-than-expected $26.28 billion. Like many top tech companies, Amazon has been ramping up its spending on the data centers, real estate and chips needed to meet the surging demand for computer power that has come with the rise of AI. Amazon’s purchases of property and equipment, a measurement of its capital spending, was $17.62 billion in the second quarter. That was over 50% higher than the year-earlier level and the highest quarterly expenditure since 2021. Chief Executive Andy Jassy has reoriented the company to focus on AI innovations and to catch up with Microsoft, Google and others in the space. Since the start of 2024, AWS has earmarked over $50 billion in investments overseas in the coming years, in countries including Germany, Japan, Singapore, Mexico and Saudi Arabia. This year, rival Microsoft also announced billions in investments for its cloud and AI infrastructure in Europe, including in Sweden, Germany and France.1
3. Boeing Risks Being Cut to Junk as Strike Hurts Production
Boeing Co. is at risk of losing its investment-grade credit rating as the embattled planemaker faces the prospect of a drawn-out strike by workers that will further disrupt production and cash flow. The credit score on Boeing’s unsecured debt has stood at Baa3 with Moody’s Ratings since April. Moody’s said in a statement on Friday that it’s reviewing the ratings for a possible downgrade and that it “will assess the strike’s duration and impact on cash flow and the potential equity capital raising Boeing may undertake to bolster its liquidity.”
Boeing has been fighting to hang on to its investment-grade rating, a mission that’s now been complicated by the strike called by workers overnight. The company has more than $45 billion in net debt and has been bleeding cash after it was forced to pare back output in the wake of a near catastrophic accident in January. A descent into junk territory would increase Boeing’s borrowing costs at a time when it’s struggling to turn around its commercial and defense operations. Boeing has also been losing money on some defense contracts, and its space business has been dogged by delays and cost overruns. The company has $4 billion of debt coming due in 2025 and also $8 billion coming due in 2026, according to Moody’s.2
4. Kroger Raises Sales Outlook on Resilient Grocery Spending
Kroger Co. lifted its full-year sales guidance as the grocery-store operator benefits from consumers prioritizing spending on groceries and other essentials. The Cincinnati-based grocer said it now expects comparable sales, excluding fuel, to rise 0.75% to 1.75%, up from the previous forecast of an increase of 0.25% to 1.75%. Kroger attracted more customers and growing visits due to low prices and personalized deals, Chief Executive Officer Rodney McMullen said on a call with analysts.
The company’s shares rose as much as 6.7% in New York trading. The stock has climbed 13% this year through Wednesday’s close, less than the gain of the S&P 500 Index. Kroger’s results are staying steady as resilient US consumers focus spending on food and staples. Many retailers have reported that shoppers are searching for deals and opting for lower-cost products such as store brands, while selectively purchasing newer discretionary items that offer value. “Customers continue adjusting to the current economic environment,” McMullen said. “The reduction of excess savings built up during the pandemic, higher interest rates, and the effect of inflation are pressuring customers’ ability to spend.” The consumption trend has helped essentials-focused retailers such as Walmart Inc. and Target Corp., while hurting operators selling big-ticket items such as Home Depot Inc.2
(1) www.wsj.com
(2) www.bloomberg.com
(3) www.cnbc.com
(4) www.reuters.com
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