- A funny thing happened on the way to this week’s Fed meeting. At the beginning of last week, markets were pricing in a high (70%) likelihood of a -25 bps cut, and, as we discuss below, the final pieces of macro data before the September meeting seemed to support such an action. But then, The Wall Street Journal ran a story by the “Fed whisperer” Nick Timiaros that laid out the logic for starting with -50 bps. Following the story, futures are now pricing a 60% chance of a -50 bps cut on Wednesday, flipping the odds.
- This is a very unusual outcome, because the Fed typically does not like to go into meetings with any degree of market uncertainty still present. As well, our view is that incoming data does not really indicate the need to “go big or go home” at this point. We acknowledge that since it is clear that rates will be coming down steadily in the months ahead, the FOMC may feel it should get moving now.
- Equities surged back from the prior week’s sell-off, with technology leading the way as in-line inflation data supported the soft-landing thesis and markets rallied on the hops for a jumbo rate cut to start the easing cycle.
- As noted above, August CPI was the last major piece of macro data before the Fed meeting, coming in mostly in-line with expectations. Headline CPI was up +0.2% MoM and 3.2% YoY, both unchanged from July. Core CPI excluding Food and Energy rose by 0.3%, slightly hotter than the forecast for 0.2% MoM, while core CPI was up 2.5% on a YoY basis, unchanged from the prior month.
- August PPI was also in-line with projections, while July figures were revised lower.
- Elsewhere in the world, central banks in Brazil (9/18), the UK (9/19), and perhaps most importantly, the Bank of Japan (9/20) are scheduled to meet this week. The BoJ move off to end zero rates for the first time since 2016 was one spark for the market jitters felt in early August.
- In equity news, Oracle (ORCL) and Adobe (ADBE) both reported in-line results and forward guidance. However, Oracle surged amid longer-term revenue projections driven by AI and cloud demand, with 2028 revenue projection of $104 bn materially higher than the $91 bn previously expected (+14%). Adobe shares sold off as the company failed to generate any long-term AI optimism. Apple (AAPL) released its new product lineup, highlighting its new AI-centric iPhone 16 with a 40% faster processor speed than the current model.
- In index news, the S&P 500 was rebalanced. Palantir (PLTR), Dell (DELL) and Indemnity (ERIE) were added, while American Airlines (AAL), Etsy (ETSY) and Bio-Rad (BIO) were removed.
The Week Ahead
- For this week, we have the FOMC meeting on Wednesday. This will be the first interest rate action from the Fed since mid-2023. This meeting will be accompanied by an update to the Fed’s forward projections and markets will likely focus on the path of rates as much as the magnitude of the first cut.
- The day before the FOMC is August retail sales. The estimate is for retail sales to decline by -0.2% MoM compared to a strong 1.0% advance in July. Excluding the volatile auto and gas categories, retail sales are expected to be slightly softer at 0.3% compared to 0.4% in July.
- In equities this week, FedEx (FDX), General Mills (GIS), Lennar (LEN) and Darden Restaurants (DRI) are among companies set to report earnings.
Market Summary – Returns and Yields
For additional insights, be sure to check out last week’s blog post.
Definitions, sources, and disclaimers
Definitions:
- Gross Domestic Product (GDP): A comprehensive measure of U.S. economic activity. GDP is the value of the goods and services produced in the United States. The growth rate of GDP is the most popular indicator of the nation’s overall economic health. Source: Bureau of Economic Analysis (BEA).
- GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, it does not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. It does not anticipate their impact on forthcoming economic reports beyond the standard internal dynamics of the model.
- The Current Employment Statistics (CES) program produces detailed industry estimates of nonfarm employment, hours, and earnings of workers on payrolls. CES National Estimates produces data for the nation, and CES State and Metro Area produces estimates for all 50 States, the District of Columbia, Puerto Rico, the Virgin Islands, and about 450 metropolitan areas and divisions. Each month, CES surveys approximately 142,000 businesses and government agencies, representing approximately 689,000 individual worksites. Source: Bureau of Labor Statistics (BLS).
- Initial Claims: An initial claim is a claim filed by an unemployed individual after a separation from an employer. The claimant requests a determination of basic eligibility for the UI program. When an initial claim is filed with a state, certain programmatic activities take place and these result in activity counts including the count of initial claims. The count of U.S. initial claims for unemployment insurance is a leading economic indicator because it is an indication of emerging labor market conditions in the country. However, these are weekly administrative data which are difficult to seasonally adjust, making the series subject to some volatility. Source: US Department of Labor (DOL).
- The Consumer Price Index (CPI): Is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available. Source: Bureau of Labor Statistics (BLS).
- The national unemployment rate: Perhaps the most widely known labor market indicator, this statistic reflects the number of unemployed people as a percentage of the labor force. Source: Bureau of Labor Statistics (BLS).
- The number of people in the labor force. This measure is the sum of the employed and the unemployed. In other words, the labor force level is the number of people who are either working or actively seeking work.Source: Bureau of Labor Statistics (BLS).
- Advance Monthly Sales for Retail and Food Services: Estimated monthly sales for retail and food services, adjusted and unadjusted for seasonal variations. Source: United States Census Bureau.
- Federal Open Market Committee (FOMC): Responsible for implementing Open market Operations (OMOs)–the purchase and sale of securities in the open market by a central bank—which are a key tool used by the US Federal Reserve in the implementation of monetary policy. Source: Federal Reserve.
- The Federal Funds Rate: Is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. Source: Federal Reserve Bank of St. Louis.
- The “core” PCE price index: Is defined as personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends. Source: Bureau of Economic Analysis (BEA).
Sources: U.S. Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), U.S. Department of Labor (DOL), Federal Reserve, Federal Reserve Economic Database (FRED), Federal Reserve Bank of Atlanta, U.S. Census Bureau, Department of Housing and Human Development (HUD), U.S. Department of Agriculture, U.S. Energy Information Administration (EIA), U..S Department of the Treasury, Office of the United States Trade Representative (USTR), U.S. Department of Commerce, data.gov, investor.gov, usa.gov, congress.gov, whitehouse.gov, U.S. Securities and Exchange Commission (SEC), Morningstar, The International Monetary Funds (IMF), The World Bank (WB), European Central bank (ECB), Bank of Japan (BOJ), European Parliament, Eurostats, Organization for Economic Co-operation and Development (OECD), National Bureau of Statistics of the People’s Republic of China, Organization of the Petroleum Exporting Countries (OPEC), World health organization (WHO).
Financial Markets – Recent Prices and Yields, and Weekly, Monthly, and YTD (Table): Bloomberg, Weekly Market Data is in USD and refers to the following indices: Macro & Market Indicators: Volatility (VIX); Oil (WTI); Dollar Index (DXA); Inflation (CPI YoY); Fixed Income: All U.S. Bonds (Bloomberg Aggregate Index); Investment Grade Corporates (Bloomberg US Corporate Index); US High Yield (Bloomberg High Yield Index), Treasuries (ICE BofA Treasury Indices); Equities: U.S. Industrials (Dow Jones Industrial Average); U.S. Large Caps (S&P 500); U.S Tech Equities (Nasdaq Composite); European (MSCI Euope), Asia Pacific (MSCI AP), and Latin America Equities (MSCI LA); Sectors (S&P 500 GICS Sectors) Source: Bloomberg. Fed Funds Rate probabilities, Source: CME FedWatch Tool.
Important Disclosures:
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from Amerant Investments, Inc. or any of its affiliates to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
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