Thierry Hasse: Fed likely to cut interest rates; the only question is by how much
It’s hard to write an exciting recap of the previous week in the financial markets when almost virtually nothing significant happened until Friday morning. Financial market participants were squarely focused on the speech by Federal Reserve Chairman Jay Powell at the Jackson Hole Symposium in Wyoming, where central bankers from all over the world congregate annually.
As expected, Powell’s message was straightforward: The time to reduce interest rates is now. The only unknown is whether the first adjustment at the September Federal Open Markets Committee meeting will be a reduction of 0.25% or 0.5%
Chief Investment Officer Thierry Hasse
On Wednesday the Bureau of Labor Statistics released its annual revision of the number of workers on payrolls. The number was revised down by 818,000, the most since 2009. While many economists were expecting the revision to be lower, the magnitude of decrease was alarming as it suggests that the strength of the U.S. labor market was overstated for quite some time. Before the report, the BLS had estimated that 2.9 million non-farm jobs had been created during the previous 12 months, an average of 242,000 per month. That average was subsequently reduced to 174,000.
When one considers that the U.S. economy needs to create approximately 150,000 per month to absorb the net new entrants into the workforce without increasing the unemployment rate, one can see why some Fed officials and market observers are concerned that a U.S. economic recession could become a reality in the not too distant future.
To add insult to injury, the BLS completely fumbled the release of its figures, delaying the posting on its website while some clever economists got the actual number by placing a simple call to the BLS. It’s inconceivable that such critical information would be disclosed in such an unprofessional manner.
Even though the communication from the Federal Reserve was expected at Jackson Hole, equity markets rallied strongly to close out the week, bringing the S&P 500 within 1% of its all-time high. In fixed income markets, the 10-year yield finished at 3.8%, with the two-year note at 3.92%. The market is now anticipating a total reduction of between 1.5 and 2 points in interest rates over the next 12 months. The magnitude of the rate reduction will be the topic of much debate – and will be dependent on continuing progress on the inflation front. Budget deficits and political developments also could derail efforts to normalize monetary policy.
Only one notable market event is on the schedule for this upcoming week: The rock star of the 2024 stock market, Nvidia, is releasing its quarterly earnings on Wednesday after the market close. Few corporate events will attract so much attention. The trillion-dollar question is will artificial intelligence developments continue their strong momentum? Nvidia is a main beneficiary of this trend. We expect equity markets to trade in a very narrow range for the first three trading days of the week. All the action, we believe, will take place after the market closes on Wednesday evening and then on Thursday morning before most market participants take off for the long Labor Day weekend.
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