Market Summary - Fed Easing Supports New Highs
After holding interest rates steady since December of last year, the Fed has resumed its monetary easing efforts by cutting the target range for the federal funds rate by 25 basis points to 4.00 – 4.25%.
The move was largely priced in with continued momentum following the long-awaited Fed decision as the market notched new record highs for the third consecutive week – so much for the anticipated seasonal weakness of September.
In addition to the rate cut, the Fed released its updated Summary of Economic Projections, which signaled an increased likelihood of further cuts for the remainder of the year. Fed members are divided on the exact number, whether it be one, two, or perhaps none.
While the rate cut news garnered enthusiasm, market participants were more focused on Fed Chair Powell’s related commentary. Powell tempered excitement by characterizing the 25bps cut as a ‘risk management’ move in response to recent weakness in the labor market.
He went on to clearly note that the focus has shifted away from inflation towards the labor market, as the Fed continues to balance its dual mandate of both maintaining price stability and fostering maximum employment.
Despite these remarks, equities rallied with large caps leading and broad outperformance by mega-cap tech. Major small cap indices reached record highs, as well, with investors showing increased risk appetite given expectations for less restrictive rate policy.
Economic data for the week was relatively light with Retail Sales for August remaining unchanged from the previous month at 0.6%, but above expectations of 0.2%. While the increase is partly due to higher prices from inflation, the report reflects respectable consumer spending and thus a positive in terms of economic growth.
U.S. Retail Sales – August (+0.6%)
While the Fed’s rate cut has sparked some refinancing activity and given some degree of relief to the housing market, pricing and affordability pressures remain evident.
Housing Starts and Building Permits for August, both leading indicators, suggest continued weakness from both the prospective buyer and builder perspectives. Housing starts declined 8.5% from the previous month, while permits declined 3.7% month-over-month.
A housing market characterized by a slew of unsold new homes combined with signs of a softening labor market have largely outweighed any relief from easing mortgage rates.
Week Ahead
Following last week’s Fed decision, the week ahead will likely see the potential for heightened volatility as numerous Fed members speak throughout the week – including Fed Chair Powell again on Tuesday.
Economic Data in the form of Durable Goods Orders for August will report alongside the final estimate of second quarter GDP growth on Thursday. Friday will offer personal spending data along with the Fed’s preferred inflation measure – Core PCE.
On the earnings front, AI momentum will be tested with Micron Technology reporting fiscal Q4 earnings on Tuesday before hyper-retailer, Costco Wholesale (COST), does the same on Friday.
As always, if you have any questions or comments please do not hesitate to reach out.
Michael Neill, CFA
Chart Sources: TradingEconomics (US Census Bureau)