Thierry Hasse: The markets say let the good times roll
“Let the good times roll” should be playing in the background as equity markets registered another week of gains and reached fresh new highs on the back of the Federal Reserve’s unexpectedly large reduction in interest rates. Even the beleaguered Chinese stock market managed to have its best weekly performance since the great financial crisis of 2008. The People’s Bank of China, China’s central bank, unveiled its biggest monetary policy since the Covid-19 pandemic, aiming to restore public confidence and pull the Chinese economy out of its deflationary malaise.
Chief Investment Officer Thierry Hasse
No mumbo jumbo
After starting their easing cycle with a “jumbo” rate cut of 50 basis points on Sept. 18, Federal Reserve officials were out in droves to provide insights into their decision. The message was straightforward: Their action to reduce rates was not a response to any undue stress in the U.S. economy but an effort to recalibrate monetary policy to a less restrictive stance given the progress made in reducing inflation. And while the U.S. job market is still relatively strong, the Federal Reserve has clearly shifted focus from fighting inflation to supporting the economy and the labor market to ensure continued economic expansion.
Bond yields hold steady
In the fixed income market what might be surprising is the lack of interest-rate volatility. One could have anticipated a sharp decrease in market yields after such a strong initial action by the U.S. central bank. But instead Treasury yields have barely moved since the Fed’s rate cut decision. The Two-Year Note yield closed the week at 3.58% and the 10-Year Note at 3.76%, so the Treasury yield curve is no longer inverted. In fact, the mildly steepening action of the Treasury curve is validating the notion that Fed monetary policy will continue to support the U.S. economy.
Inflation taps the brakes
With perfect timing, the Bureau of Economic Analysis on Friday released the latest information on the Personal Consumption Expenditure index, the Fed’s preferred measure of inflation for goods and services. The news was unequivocally positive: In August the PCE rose only 0.1% from July and was up 2.2% year over year, within striking distance of the Federal Reserve’s 2% target. This information was enough to send the Dow Jones Index to a record closing high of 42,313, while the S&P 500 Index recorded a new high the previous day, for a gain of 20% so far in 2024. Good times indeed are here for investors!
Jobs report due Friday
This week as the third quarter comes to a close we anticipate a quiet initial part of the week ahead of the Friday release of the latest jobs report. Market participants expect a steady unemployment rate of 4.2% and the creation of 144,000 non-farm payroll jobs. (Source: Wall Street Journal). If the actual figures show any significant deviation from these expectations, one can be sure that the debate on the size of the next rate cut by the Federal Reserve will begin raging.
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