A DOSE OF REALITY AND NOW WHAT?
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?DJIA 52-wk: +13.32% YTD: +5.43% Wkly: -2.10%?
?S&P 500 52-wk: +19.40% YTD: +12.09% Wky: -2.06%
?NASDAQ 52-wk: +20.81% YTD: +11.78% Wkly: -3.35%
?Russell 2000: 52-wk: +7.76% YTD: +4.06% Wkly: -6.67%
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JOBLESS RATE:
American employers reined in their hiring significantly in July, intensifying jitters that the economy is cooling faster than expected. Payrolls grew by 114,000, the Labor Dept. reported on Friday, the second smallest gain in a 43-month period of consistent job growth. The unemployment rate rose to 4.3%, the highest level since October 2021, when anxiety about the pandemic was still elevated. The New York Times reports.
FRIDAY’S DROP:
Followed a report on U.S. hiring in July that was far weaker than expected, starting investors into worrying that the Fed has been too slow to cut interest rates. Traders were already growing uneasy about the state of the economy, as well as the prospects for the big technology stocks that had underpinned a market rally for much of the year, but the jobs report intensified the focus on the risks. Markets are now predicting a half a percent cut when the Fed meets next in September, up from the more usual quarter-point cut investors had been anticipating as of Thursday, according to CME FedWatch. The two-year Treasury yield, which is also reflective of short-term interest rate expectations, fell 26 basis points, to 3.9%. The 10-year U.S. Treasury yield – which underpins many other borrowing costs – fell to 3.8%, after dropping below 4% on Thursday.?The New York Times reports.
THIS WEEK’S VOLATILITY:
Reflects a “sea change in psychology” among investors who have been hoping for conditions that would allow the Fed to cut interest rates, Mr. Sosnick, who is the chief strategist at Interactive Brokers, said. Lower interest rates are a boon for the economy, but if they come because the Fed is worried about growth, that could hurt sentiment. “This is very much a real case of be careful what you wish for,” Mr. Sosnick said. “All of a sudden, everybody decided, ‘Uh oh, they’re late.’”
Recession Talk Grows After Wall Street’s Fraught Friday. Why the Panic Will Subside. Panic can quickly sweep through a flight cabin, and we saw something similar happen Friday on Wall Street when higher-than-hoped-for unemployment numbers sent the S&P 500 down nearly 2%. The New York Times reports.
When the jobless rate for July came in at 4.3%, instead of the expected 4.1%, and new jobs were two-thirds the predicted level, traders also dropped the Nasdaq Composite by 2.4%. They also reached for the motion-sickness pills known as the Cboe Volatility Index, which jumped 26% Friday after going little used for a year.
The gripe down the aisles is that Capt. Jerome Powell (better known as Federal Reserve Chair Jerome Powell) and his crew at the U.S. central bank have pitched the plane toward a hard landing by keeping interest rates high for too long. The hard landing metaphor means a recession, of course. But there are two reasons why the panic should subside.
First, the market usually overreacts to the latest data point. If it didn’t, there would never be opportunities for a smart investor. Powell was mindful of this on Wednesday when the Federal Reserve held rates steady and said: “We will be data dependent but not data-point dependent, so it will not be a question of responding specifically to one or two data releases.”
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And secondly, though the Fed’s command of the economy is overstated, there’s a big lever waiting to be pulled. That’s the federal-funds rate which has been cranked to a 23-year high of 5.5%. Powell also mentioned this on Wednesday, reminding his audience how that gives the Fed plenty of flexibility to support the economy as needed.
Powell all but confirmed that interest rates will come down on Sept. 18, when the Fed makes an announcement on rates at its next meeting. Bets shifted Friday on the size and speed of that rate drop. At the CME FedWatch tool, the rates implied by the 30-Day Fed Funds futures prices showed some bettors moving from wagering a quarter-point drop to wagering a half-point drop.
At UBS Financial Services, investment chief Brian Rose wrote Friday that he still maintains his view that the U.S. economy is headed toward a soft landing. “Household and business balance sheets are still strong in aggregate, and lower interest rates should help to keep the economic expansion going,” Rose said.
UBS had predicted that rate cuts would total half a percentage point by year-end. After the jolt of the data Friday, UBS changed its view. It now expects a half-point cut in September, followed by quarter-point cuts in both November and December, for a total drop of 1 percentage point by the end of the year.
The market’s rise in the past year, with remarkably few bumps, has been one of the smoothest in decades. Ahead lies a bitterly contested U.S. presidential election and a rate-cutting cycle, so some increase in volatility can be expected.
But no need to put on your life vests. Barron’s reports.
THIS WEEK'S INTERESTING SECTOR PIECE
How to make the most of today’s market?
Let's see what the?Bears?have to say in response.
The Market's Fed Exuberance:?At the start of the year, the consensus view reflected five to six rate cuts in 2024. But this view has shifted markedly after three back-to-back unfavorable inflation readings over the last three months. The expectation at present is for one or two rate cuts this year, with the first cut in September provided incoming economic data over the remaining two months remain supportive.
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The risks to this outlook are twofold. The first is that the September rate-cut timeline may not pan out, as it will be next to impossible for the Fed to start cutting rates at its next meeting if the next two inflation readings fail to show progress on the inflation front. This is exactly how inflation behaved in the first three months of the year, forcing a reset of the market's Fed expectations.
Tied to the first risk is the prospect that economic health may be far more fragile than the quarterly GDP readings suggest. Low-income households have been struggling for a while, but anecdotal evidence from Q2 earnings calls suggests that even better-off consumers are getting more cautious in their spending plans.
In the worst-case scenario, stalled progress on the inflation front may stop the Fed from easing policy even as the economy continues to weaken further. But even if that isn't the case and the Fed starts easing in September or at any of its subsequent meetings, the decelerating momentum in the economy may be hard to stop by then. Nasdaq reports.
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What if the FED cuts 50 basis points in September?
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Richie
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