The State of Markets: ‘The Fed -> 50 or 25bps?’
“We are at a point where you might say, ‘I could go either way — 25 or 50,’ but I think the risk management has shifted to the labor market and favors doing 50,” he said.
Source: WSJ, 12th September, “The Fed’s Rate-Cut Dilemma: Start Big or Small?” Nick Timiraos, Sept. 12, 2024
https://www.wsj.com/economy/central-banking/fed-interest-rate-cut-size-861c9600
It’s all eyes on the Fed this coming week as they meet to kick start a rate cutting cycle. The market is split as to whether the first cut will be a standard 25bps cut or a ‘front loaded’ 50bps. On Wednesday, after a slightly disappointing US monthly core CPI print, the market moved away from the likelihood of 50bps next week. By Thursday, however, after an article by Nick Timiraos in the WSJ (see quote above), the probability of 50bps had shifted sharply back into focus. With that, US 1-year bond yields made a new (almost) 2 year low on Friday (along with US 2-year yields), while gold made a new high. Timiraos is widely regarded as a ‘mouthpiece’ for the Fed, who often use his articles to signal their intentions to the market. A similar article appeared in the FT.
Whilst markets were down at the start of September, they bounced back sharply last week (helped by the increasing chance of 50bps). The S&P500 was +4.0% on the week (after falling by 4.2% in the prior week); the NDX100 was +5.8% (after -5.9% the prior week); while, more dramatically, the Philly SOX index was +10.0% (after -12.2%). With that, some key indices have now generated pennant patterns (e.g. see key chart below). Often that’s associated with indecision in markets, as they ‘tread water’ in a narrowing range (before then breaking out one way or the other).
As well as the Fed decision on Wednesday (along with a press conference and an updated summary of economic projections), there’s also a ‘housing data’ theme in the US, with the release of the NAHB homebuilders’ index (Tuesday); housing starts and building permits (Wednesday); and existing home sales (Thursday). Elsewhere there are monetary policy decisions from both the BoE (Thursday) and BoJ (Friday). Please see below for a full list of key macro data & events.
Key chart: Philly SOX cash candlestick, shown with 50 & 200 day moving averages
Upcoming important data/events this week:
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Events: |
Trump vs. Harris presidential debate (Tues, 9:00 pm EDT); ECB policy decision (Thurs, 1:15pm) followed by press conference hosted by Lagarde (Thurs, 1:45pm). |
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Monday: |
Chinese CPI & PPI (Aug, 2:30am); US consumer credit (Jul, 8pm). |
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Tuesday: |
UK employment, jobless claims & average weekly earnings (Juk/Aug, 7am); US NFIB small business optimism (Aug, 11am). |
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Wednesday: |
US headline & core CPI (Aug, 1:30pm); Chinese total social financing, new yuan loans, and M0, M1 & M2 money supply (Aug, 9am). |
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Thursday: |
US headline & core PPI (Aug, 1:30pm). |
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Friday: |
US Michigan sentiment (September first estimate, 3pm). |
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Key earnings: |
Oracle (Mon); Inditex (Wed); Adobe, Kroger (Thurs). |
Key Research
Quarterly Asset Allocation No. 59, 12th September 2024:
““China: Turning Japanese”
“China must act on deflation, former central bank governor warns.
Yi Gang calls for looser monetary policy in rare admission of pressing economic concern”
Source: FT article, 6th September 2024
China’s 10 yield government bond yield closed today at 2.10%. That’s its lowest level on record (fig 8). It’s fallen particularly sharply in recent years (by 60bps since Dec 2023) and from an approx. 4% peak in 2017. In 2014 it was yielding almost 5%. Those continued falls, though, are reminiscent of the Japanese 10 year JGB in the 1990s. At the time, there was disbelief that the yield would keep on going lower (as it did in the 1990s, eventually reaching below 1% during the Russian crisis).
Key North American macro data & events
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Events: |
Fed policy decision & summary of economic projections (Wed, 7pm); Bank of Canada publishes summary of deliberations (Wed, 6:30pm). |
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Monday: |
US Empire manufacturing (Sept, 1:30pm); Canadian existing home sales (Aug, 2pm). |
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Tuesday: |
Canadian housing starts (Aug, 1:15pm); US retail sales (Aug, 1:30pm); US New York Fed services business activity (Sept, 1:30pm); Canadian headline & core CPI (Aug, 1:30pm); US industrial & manufacturing production & capacity utilisation (Aug, 2:15pm); US business inventories (Jul, 3pm); US NAHB homebuilders index (Sept, 3pm). |
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Wednesday: |
US housing starts & building permits (Aug, 1:30pm); US total net TIC flows (Jul, 9pm). |
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Thursday: |
US current account balance (Q2, 1:30pm); US Philadelphia Fed business outlook (Sept, 1:30pm); US weekly jobless claims (1:30pm); US Conference Board leading index (Aug, 3pm); US existing home sales (Aug, 3pm). |
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Friday: |
Canadian retail sales (Jul, 1:30pm); Canadian industrial product & raw material price index (Aug, 1:30pm). |
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Key earnings: |
Ferguson (Tues); General Mills (Wed); FedEx, Lennar (Thurs). |
Fig B: US Conference Board leading index (Y-o-Y %)
Key European macro data & events
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Fig C: Eurozone consumer confidence (index)
Key UK macro data & events
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Events: |
Bank of England policy decision (Thurs, 12pm). |
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Monday: |
Rightmove house prices (Sept, 12am). |
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Tuesday: |
N/A |
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Wednesday: |
Headline & core CPI, RPI & PPI (Aug, 7am); Land Registry house prices (Jul, 9:30am). |
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Thursday: |
N/A |
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Friday: |
GfK consumer confidence (Sept, 12am); retail sales (Aug, 7am); public sector finances (Aug, 7am). |
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Key earnings: |
N/A |
Fig D: UK services & goods CPI (Y-o-Y %)
Key Asia-Pacific macro data & events
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Fig E: Japanese headline & core CPI (Y-o-Y %)
Last week:
Longview on Friday, 13th September 2024:
“How Strong is the US Consumer”
Quarterly Asset Allocation No. 59, 12th September 2024:
“China: Turning Japanese”
The SHORT VIEW (& market positioning), 10th September 2024:
“OIL: BUY Case Brewing”
Prior week:
Longview on Friday, 6th September 2024:
“Is This Time Different?”
Quarterly Asset Allocation No. 59, 5th September 2024:
“Eurozone: North – South Divide a.k.a. German Recession (likely) Coming”
Tactical Equity Asset Allocation No. 248, 5th September 2024:
“More (Wave 3) SELLing Expected a.k.a. Stay Tactically Cautious”
Monthly Global Asset Allocation No. 49, 3rd September 2024:
“Move NEUTRAL US Treasuries in Strategic Portfolio”