Tuesday Morning Market Snapshot

Morning Market Snapshot:

Stock index futures are higher, with the S&P 500 +0.16%, the Nasdaq 100 +0.24%, and the Dow Jones Industrial Average +0.15%.

The major developments overnight/late yesterday were… focused on monetary policy.

The People’s Bank of China (“PBOC”) announced a rash of stimulus measures. Governor Pan Gongsheng said it would cut banks’ reserve requirements by 50 basis points to support economic growth… it will lower rates on existing mortgages to current levels, to support the housing market… it will lower the seven-day reverse repo rate to allow cheaper access to money by banks… and it will set up $71 billion facility allowing insurance companies and asset managers to borrow and invest in stocks as well as a $43 billion lending program for corporate stock buybacks.

Yesterday the PBOC announced it would take action to shore up financial-system liquidity before the week-long National Day holiday (October 1-7) and heading into the end of the third quarter. It said it would introduce $33.3 billion into the banking system via open-market operations, at a lower rate than its previous operation in February.

Bank of Japan Governor Kazuo Ueda said the central bank is in no rush to raise interest rates, but will do so if the data support such a move. The Reserve Bank of Australia left the cash rate unchanged at 4.35%. In its latest monetary policy update, the board struck a less hawkish tone. Governor Michele Bullock said it didn’t discuss rate hikes. However, it seems unlikely there will be a rate cut this year.

Domestically, the conversation focused on commentary from several Federal Reserve officials. Atlanta President Raphael Bostic (hawk, voter) said inflation growth was slowing faster than he thought possible just a few months ago. He said the risks to employment growth are rising, warranting last week’s 50 basis point cut and opening the door for more this year.

Chicago President Austan Goolsbee (dove, non-voter) struck a similar tone. In a speech to the National Association of State Treasurers, he said inflation growth and the unemployment rate have achieved desirable levels from a Fed outlook perspective. Consequently, he feels there will be “many more rate cuts” over the coming year as the central bank seeks to engineer a soft economic landing.

Minneapolis President Neel Kashkari (hawk, non-voter) also endorsed last week’s rate cut. He endorsed cutting rates two more times before the end of this year by a total of 50 basis points (25 each at the November and December policy meetings). This was a contrast to comments he made a month ago, calling for rates to remain higher for longer.

Stocks in Europe and Asia were broadly higher… Luxury goods makers and miners rallied on the Chinese stimulus measures. European growth continues to founder, pointing to the need for more central bank support. Yesterday’s preliminary S&P Global Eurozone PMI data for September showed both services and manufacturing activity slowed compared to August. Germany, the region’s largest economy, was the culprit as confidence continued to wane. The Ifo Institute said the German economy is “under ever- increasing pressure”, after its business climate survey weakened for the fourth month

My perspective on the markets… Investor expectations for Federal Reserve monetary policy have grown increasingly dovish. The bond market currently expects the effective federal funds rate will drop to 2.9% by July 2025, compared to the current 4.6%. As I mentioned above, following last week’s rate cut, policymakers including Chairman Jerome Powell, are increasingly worried about rising unemployment and declining job openings. The shift should underpin optimism for even easier monetary policy heading into next year..

Currently, the S&P 500 trades at a 21.4 times multiple of its forward 12-month earnings. That’s above the five- and 10-year averages of 19.4 times and 18 times, respectively. Given the outlook for easing monetary policy and consensus expectations for S&P 500 earnings to grow 4.6% and 15.4% in the third- and fourth-quarter of 2024, respectively, stocks should have more room to the upside. The bottom-up price target for the S&P 500 is 6,280, or a rally of 10%, over the next 12 months. U.S. Treasury bonds should also continue to rally given the prospect of lower interest rates.

However, the near-term environment is likely to remain choppy as September is typically the worst month of the year for S&P 500 returns. At the same time, the uncertainty of the November election outcome, and paused stock buybacks, will likely keep money managers hesitant until the direction looks more certain. But, once these headwinds are behind us (early November), the outlook for stocks should improve.

Investors still have questions about the domestic economic growth outlook… The pessimist argument against investing focuses on recent employment (August nonfarm payroll growth, declining job openings figures) and economic (Fed’s Beige Book Survey showed weakening output) data. Last week’s 50 basis point rate cut by the Fed stoked speculation the economy is rapidly deteriorating.

The optimists argue economic numbers suggest growth is not as bad as feared. S&P Global’s composite PMI data for September and the New York Fed’s Empire Manufacturing Survey pointed to the potential for a soft economic landing. Retail sales figures for August unexpectedly rose, industrial production rebounded into expansion territory, while housing starts and building permits were stronger than anticipated. Those results point to consumers becoming increasingly optimistic about the potential for even lower interest rates by the end of this year and early next.

All of that should support more interest rate cuts from the Fed moving forward. The shift will stabilize domestic economic output. Stagflation fears may be overblown given the Atlanta Fed is forecasting third-quarter GDP growth of 2.9% and the Cleveland Fed foresees August headline PCE growth around 2.3% and September just below 2.1%.

Looking ahead… This week brings a number of important updates on global economic growth. France and Spain will release preliminary inflation numbers for September. That will provide Wall Street with a window into the potential for more ECB rate cuts. The U.S. Bureau of Economic Analysis will unveil personal consumption expenditures (“PCE”) growth for August. Investors will be paying close attention to the rate of slowdown in core PCE, the Fed’s preferred inflation gauge.

On the monetary policy front, the Swiss National Bank is expected to cut interest rates by another 25 basis points when it meets on Thursday. That same day, policymakers from all over the world will be speaking at the Federal Reserve Bank of New York’s Annual Treasury Market Conference.

Third-quarter earnings reports formally get underway on October 11, when JPMorgan (JPM) releases results. They wrap-up when Disney (DIS) details numbers on November 7. The most important weeks to watch will be at the end of October. That’s when major technology companies like Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Meta (META), and Microsoft (MSFT) are scheduled to report. Once those results are out of the way, most corporate buybacks can resume, powering stocks higher into year end.

Pre-Market Levels:

Economic Calendar:

Earnings – AZO (before the open)

Reserve Bank of Australia Monetary Policy Announcement Japan – au Jibun Bank Japan Manufacturing, Services, Composite PMI (Preliminary) for September BOJ’s Ueda Speaks (1 a.m.) Germany – Ifo Business Sentiment for September (4 a.m.) Fed’s Bowman (Board Member) Speaks (9 a.m.) FHFA House Price Index for July (9 a.m.) S&P CoreLogic Case-Shiller Home Price Index for July (9 a.m.) Conference Board Consumer Confidence for September (10 a.m.) Richmond Fed Manufacturing Index for September (10 a.m.) Treasury Auctions $60 Billion in 6-Week Bills (11:30 a.m.) ECB’s Nagel (Germany) Speaks (12 p.m.) BOC’s Macklem (Governor) Speaks (12:55 p.m.) Treasury Auctions $69 Billion in 2-Year Notes (1 p.m.) M2 Money Supply for August (1 p.m.) American Petroleum Institute Crude Oil Inventory Data (4:30 p.m.)

Stories to Know…

Economic Growth:

Domestic…

Inflation extends cooling streak to hit 2.5% in August – WSJ. U.S. job growth rebounded in August from levels that were softer than initially reported this summer – WSJ. U.S. job openings fall to the lowest level since January 2021 – Bloomberg. The Federal Reserve’s Beige Book survey showed economic growth is flat to declining in three-quarters of the regional districts – Federal Reserve. U.S. manufacturing contracted at a moderate pace in August– Reuters. Housing costs, the biggest contributor to U.S. inflation, are on track to ease through the end of the year – Bloomberg. JPMorgan president Daniel Pinto warned Wall Street’s net interest income expectations for next year are too high – FT.

Global…

Japan's government said the economy was in moderate recovery but it remains cautious – Reuters. Japan's economy grew at a slower pace than initially reported in the second quarter – yahoo!finance. Core consumer prices in Japan's capital rose 2.4% in August from a year earlier – Reuters. China's August industrial output and retail sales point to decelerating growth– Reuters. China’s import growth for August was weaker than expected – Reuters. China’s consumer inflation shows lack of meaningful growth while factory prices keep falling – Reuters. China's manufacturing activity sank to a six-month low in August– Reuters. Investment banks are cutting their growth forecasts for China – FT. German inflation fell to its lowest level in more than three years in August – Reuters. Factories in the eurozone remained mired in contraction in August - Reuters. European banks are on course to record zero growth in mortgage lending for the first time in a decade – FT. Australia’s economy recorded its weakest growth momentum since the early 1990s in the second quarter – WSJ.

Monetary Policy:

Domestic…

The Federal Reserve voted to lower interest rates by a half-percentage point – WSJ. Federal Reserve Chair Jerome Powell said policymakers are committed to sustaining a low unemployment rate now that inflation has eased – Reuters. The Fed has significantly improved the odds of a soft landing – WSJ. Fed Chair Powell said strong financial-system liquidity will allow the balance sheet runoff to continue – Reuters. Fed’s big opening move is rocket fuel for stocks – Bloomberg. U.S. inflation growth may soon be back below the Fed’s 2% target – Reuters.

Global…

Some Bank of Canada officials are increasingly worried about the downside risks of inflation – Bloomberg. Bank of Canada governor Tiff Macklem has opened the door to accelerating the pace of interest rate cuts – FT. European Central Bank President Christine Lagarde said it’s more likely to cut rates again in December – Bloomberg. Bank of Japan Board Member Naoki Tamura called for interest rates to rise to 1% by late next year – Reuters. Bank of Japan board member Junko Nakagawa repeated the bank’s stance of pursuing more rate increases – WSJ. Bank of Japan Governor Kazuo Ueda reaffirmed his resolve to raise interest rates if inflation stayed on course to sustainably hit the 2% target – Reuters. Bank of Japan Board Member Hajime Takata said it must use a measured pace to rate hikes – Reuters. Former Bank of Japan Governor Haruhiko Kuroda said it likely isn’t done raising interest rates, suggesting the neutral rate may exist closer to 2% - Bloomberg.