Market Updates and Industry Insights

Markets asked for a 50 basis point rate cut and the Fed delivered!  This week the Federal Reserve cut the Fed Funds rate by 0.50%, marking the first rate cut since the start of the pandemic in early 2020.  Unlike previous meetings this rate decision was not a unanimous vote, with FOMC Governor Bowman voting for only 25 basis points of cut.  There were multiple changes in the written statement from the committee.  The Fed noted that the labor market has slowed and inflation has made further progress towards target but still remains elevated; but that the Fed has gained greater confidence in inflation moving sustainably towards target.  For months now the Fed has been noting that they needed more months of good inflation data to lead to a higher confidence level prior to reducing rates.

At this time Powell and crew at the FOMC feels that risks to the economy are currently in good balance and its time to start returning the Fed Funds rate to a more longer term neutral rate from the previously higher and restrictive rate – calling this a recalibration of policy levels.  Additionally, the Fed’s ‘dot plot’ sees additional rate cuts before the end of this year and further cuts in 2025.  However, Powell was clear to markets not to expect 50 bps per meeting as the ongoing rate cut pace.  The Fed remains data dependent in considering its path for the Fed Funds rate at each meeting moving forward, and will look at economic data along with its interpretations and forecasts for the future of the economy.  Markets have been looking forward to and calling for this rate move, with the 10-year treasury yield falling some 50 basis points over the past two months and is now sitting at the lowest levels since mid-2023.  While the Fed rate cut makes headlines it can be confusing at times as this rate cut does not mean that longer term mortgage rates declined by the same amount in just one day.  30 year mortgage rates factor in much longer expectations.

Following the downward movement in treasury yields in anticipation of the Fed rate cut, mortgage rates have been moving lower.  The weekly 30 year fixed rate average as published by Freddie Mac hit the lowest in two years this week at 6.09%.  Housing markets will look to this positive trend in mortgage rates to help stimulate home sale transactions into the fall.  This week the NAR reported that existing home sales fell 2.5% in August from the prior month and are 4.2% lower than a year ago.  Median home prices continue to rise nationwide, increasing for the 14th consecutive month to $413,700 in August, an increase of 3.1% from the prior year.  In our local Massachusetts market, the number of single family sales in August was down 0.3% from the prior year, while the median sales price rose by 3.2% from the prior year to $650,000.  Prices remain below the peak median of $699,900 this past June.

^{The content of this publication is provided for informational purposes only and is not intended to recommend any financial decision or course of action.  Any financial and investment decision should be made in consultation with your financial advisors and representatives and should be evaluated at your own risk.}

Markets have now largely returned to their pre-Fed cut levels (down ~30 basis points from the intra-day highs) after digesting the mega 50 basis point cut from the Fed along with Chair Powell’s commentary in the press conference.  Below is this meeting’s written statement indicating changes from the previous statement.  Notably also the vote was not unanimous this time, with one Fed governor voting for only 25 basis points of cut.  Common themes noted by Jay Powell in the spoken remarks include:

•    The Fed is now “recalibrating” policy levels to more neutral rates
•    This meeting’s 50 basis point cut should not be viewed as the new pace of rate cuts to be expected at future meetings
•    The Fed remains data dependent to determine the future path of rate cuts
•    The Fed considers its responsibility to the American people to support a strong economy, not to influence any political election
•    Chair Powell is happy with how the Fed has held rates to this point while other central banks have been cutting rates and thinks that the Fed is in a strong position currently to support the economy

^{The content of this publication is provided for informational purposes only and is not intended to recommend any financial decision or course of action.  Any financial and investment decision should be made in consultation with your financial advisors and representatives and should be evaluated at your own risk.}

The August Jobs Report is in! Lets take a look at the numbers and see what this means. The headline numbers are 142,000 jobs gained in August and a slim decline in the unemployment rate to 4.2%. These figures themselves are largely in line with expectations. Digging a bit deeper we see the report also included a cumulative reduction in job creations for the prior two months amounting to a combined 86,000 which pushes the August number to the highest since May. August’s gain of 142,000 is well below the average of 202,000 over the prior 12 months. Average hourly earnings increased by $0.14 or 0.4% from the prior month and have increased by 3.8% from a year ago. This is largely in line with inflation – meaning that Americans have gained nothing in terms of purchasing power despite seeing nominal wage gains. The largest sectors for job gains were leisure/hospitality, construction and healthcare with 46,000, 34,000 and 31,000 new jobs respectively. The government sector added just 24,000 jobs for the month. The manufacturing sector showed some weakness, with a decrease of 24,000 jobs during the month. The weekly initial jobless claims data has also been steady over the past month with weekly claims ranging from 227,000 to 234,000. Nothing particularly stands out in today’s jobs report that should shift markets (or the Fed) one direction or the other. Today’s report shows that there continues to be mild slowdown in the labor market; but nothing signals the need for emergency stimulus, in the form of a large rate cut, from the Fed. On the release of the jobs report markets are moving towards marginally lower yields, but this new data is largely a non-market mover. Yields continue trending lower over the past month, with 10-year Treasury and 2-year Treasury at or near 52 week lows. Additionally, the yield curve inversion continues to reverse with markets recently showing a flat or even more normal risk premium of one or two basis points for longer out on the curve.

How should markets be trending and what will happen at the September 18th Fed meeting? With last week’s PCE inflation data and today’s jobs report largely in line with both expectations and prior month readings I don’t see a reason for the Fed to cut more than 25 basis points this month. We’ll still get August CPI next week prior to the Fed’s meeting, but decisions on the economy and size of rate cut will likely already be finalized prior to that data. In Jackson Hole last month Fed Chair Jay Powell was clear that the Fed views the time has come to start to normalize policy, but I don’t see a 50 basis point cut in September as needed to begin the normalizing process. A cut this large would signal concern over the strength of the labor market and that the Fed feels they are too late in starting to reduce rates. The Fed has maintained their data dependence in making decisions and based on my interpretation of the data a 25 basis point cut is all that is warranted currently, followed by a pause to continue to review future economic data and trends. Speaking today Fed Governor Christopher Waller echoed Powell’s remarks, stating “I believe the time has come to lower the target range for the federal funds rate at our upcoming meeting.” The Fed is in search of the elusive and theoretical “neutral rate” for Fed Funds at which risks in the economy become perfectly balanced and interest rates are neither stimulative nor restrictive.

^{The content of this publication is provided for informational purposes only and is not intended to recommend any financial decision or course of action.  Any financial and investment decision should be made in consultation with your financial advisors and representatives and should be evaluated at your own risk.}

Friday morning Fed Chair Jerome Powell took to the podium at the Federal Reserve’s Economic Symposium from beautiful Jackson Hole Wyoming with the backdrop of the Grand Tetons.  Speaking with his typical gentle and measured approach Powell cemented in a Fed rate cut for the September meeting.  “The time has come” said Chair Powell.  In summarizing current economic conditions Chair Powell noted, “The labor market has cooled considerably from its formerly overheated state…rising unemployment has not been the result of elevated layoffs, rather the increase mainly reflects a substantial increase in the supply of workers and a slowdown from the previously frantic pace of hiring.  The cooling in labor market conditions is unmistakable.”  Regarding inflation Chair Powell noted that the Fed has greater confidence that inflation is trending toward its target, noting that recent inflation readings are only 2.5%.  While a rate cut in September seems certain at this time what Powell left open for market debate remains how big the cut will be and what the future pace and timing of additional possible cuts will look like.  “The timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks” noted the ever-steady Powell.  Speaking with the reassurance of an economic sage, the Fed Chair brings a composed presence to such delicate matters that often elicit strong emotional moves in financial markets.  

Transitioning to a rate cutting cycle at this point, given the current 5.25%-5.50% range where Fed Funds is currently, the Fed will have ample room to cut rates while observing adjustments in economic data readings as a result of lower rates.  Current expectations for the September 18th rate decision are two thirds for a 25 basis point cut and just one third for a larger 50 basis points cut.  Through the end of 2024 the Fed will have three more FOMC meetings at which to adjust rates, with the most recent upcoming meeting in September.  Markets are largely expecting 100 or more basis points in rate cuts by the end of the year, which would seem to be quite drastic given the continued strength of the US economy.  Unemployment, while it has risen from lows earlier this year, remains historically low, and inflation is nearly under control back within close proximity to the Fed’s 2% target.  Additionally, 100 or more basis points in rate cuts over just three meetings requires a cut of larger than 25 basis points at one or more of the meetings – which markets could interpret as the Fed seeing additional weakness in the economy above the mild slowdown that it has communicated thus far.  Based on Fed Chair Jay Powell’s remarks a more measured and slower pace of rate cuts seems appropriate as the Fed makes decisions for each meeting based on the totality of economic data at the time and its views of current and futures risks to the economy.

Also this week, existing home sales rose for the month of July for the first time in five months, rising 1.3%; despite being lower than July sales in the prior year by 2.5%.  New home sales also surged for July, up 5.6% nationally, to the highest since May 2023.  Closer to home the Massachusetts Association of Realtors reported that Massachusetts single family sales for the month of July were 10% higher than last year, with 4,216 transactions closed.  Condo units were slightly higher than prior year, up just 1%.  In positive news looking ahead, single family new listings were 12% higher than prior year for single family homes, and 5% higher for condos.
 

^{The content of this publication is provided for informational purposes only and is not intended to recommend any financial decision or course of action.  Any financial and investment decision should be made in consultation with your financial advisors and representatives and should be evaluated at your own risk.}

An action packed week comes to a close with a quiet Friday in terms of economic news releases.  This week we had CPI, PPI, Initial Weekly Jobless Claims and Retail Sales.  Data this week has calmed markets and shifted expectations around what the Fed will do in September.  CPI Inflation came in at 0.2% month over month and 2.9% year over year, in line with expectations for the month of July.  The annual pace is down 0.1% from the prior month’s reading, providing the Fed with another data point toward confidence that inflation is sustainably trending to target.  Core CPI also declined by a tenth of a percent to a 3.2% annual pace.  The Producer Price Index, or PPI, which measures input prices came in slightly lower than expected, with a 0.1% increase from the prior month and 2.2% increase from the prior year.  

Another welcome sign that the pace of price gains is slowing.  Retail sales for the month of July showed a surprise 1% increase, which was more than double expectations and signals that the American consumer remains healthy and is still spending.  This was the highest retail sales monthly increase in over two years.  The final major piece of economic news came in the form of the now closely watched weekly initial jobless claims.  Recall that the August 2 jobs report for the month of July was a big miss on expectations and sent markets into a wild freefall.  Panic ensued that the Fed should have already been cutting rates and now was too late.  There were even calls for emergency action from the Fed for a between meeting rate cut.  Since the recent peak at the end of July, weekly new unemployment claims have slowed substantially to put fears at ease regarding the strength of the labor market.  With this recent barrage of economic news, along with the Fed’s last meeting just two days prior to the July jobs report, market expectations for the magnitude of Fed cut in September as seen in the chart above have been quite fluid.  Leading up the jobs report a 25 basis point cut seemed all that was needed; after it appeared there were major cracks in the labor market a more substantial 50 basis point cut was priced into markets.

As additional data came forth this week, markets cooled and again reversed course, now implying a 25 basis point cut.
As it appears we’re on cusp of a shift in monetary policy and heading into a cycle of the Fed cutting rates, long-term rates have responded favorably.  The 10-year treasury has fallen over 50 basis points from its recent cycle July 1 highs, and mortgage rates also now sit at their lowest in over a year, down more than a full 1% from highs seen last fall.
 

^{The content of this publication is provided for informational purposes only and is not intended to recommend any financial decision or course of action.  Any financial and investment decision should be made in consultation with your financial advisors and representatives and should be evaluated at your own risk.}

Following last week’s jobs report for the month in July coming in weaker than expected along with the ripple effect through global markets from the Bank of Japan unexpectedly raising rates this week has been chaos in markets as traders and economists try to predict the direction of the economy and how quickly the Fed will intervene. The 10-year Treasury yield has been quite violent in its volatility, as has MBS pricing and equity markets. The 10-year treasury yield as seen in the chart to the left has fallen sharply from its 2024 high of 4.70% near the end of April to an intraday low of 3.66% this past Monday to climbing back to 4.00% on Thursday, and now hovering slightly at 3.94% this Friday morning. Looking over a shorter period of time, from the July 31st Fed meeting day close of 4.10% over the next 3 trading sessions the yield fell some 44 basis points to its low point; followed by an increase of 34 basis points. Equity markets also tumbled over this stretch with the DOW off a record high level of 41,000 falling more than 5% in just a few days to a low of 38,700; only to be followed up with the largest single day gain of the year once markets calmed down. What does all this volatility mean? Expectations for the near term future are uncertain; what seemed for sure to be the smooth soft landing for the economy from the decades high inflation now seems more in jeopardy as last month’s jobs data showed the labor market may have weakened. Rates are on the decline, but it may be a bumpy ride. However, we needn’t jump to conclusions too quickly over a single data point.

Chicago Fed President Austan Goolsbee reminded markets, “Is it going to stop there? Or is it going to keep getting worse? To me, that’s not one you can answer with one month’s number…we gotta to watch it for a lot more than just once month.” To this end markets, and the Fed, are paying closer attention to the weekly intitial jobless claims as reported every Thursday morning by the US Department of Labor. The chart to the right shows the weekly initial claims along with trailing 4-week average trend, which helps to smooth out some outlier weekly readings which can be caused by one-time events such as weather or strike related spikes in claims. As seen in the trend line, since the start of the year claims have been on the rise, however this week’s closely watched report showed 233,000 initial jobless claims, a decline from the prior week and also lower than the four week average.

Also making headlines this week, the Freddie Mac weekly survey on mortgage rates reported that the 30 year fixed rate mortgage averaged 6.47% as of August 8th, the lowest of the year, and the lowest going back till May 2023. A reduction in mortgage rates could help to fuel late summer buyer demand as lower rates help buyer affordability, but as rates still remain well above the rates for the majority of current home owners this current downward move is unlikely to help bring additional housing supply to the market.

^{The content of this publication is provided for informational purposes only and is not intended to recommend any financial decision or course of action.  Any financial and investment decision should be made in consultation with your financial advisors and representatives and should be evaluated at your own risk.}

The Federal Reserve held interest rates steady at the 5.25%-5.50% range as was largely expected, in a unanimous vote by the committee members.  Markets are widely expecting a 25-basis point rate cut at the Fed’s next meeting in September and while Chair Powell would not specifically agree to a cut at the next meeting, he made little comments during the press conference to dissuade from that.  Cue up Earth, Wind & Fire as it looks like we’ll be Dancing in September!  What will it take for the Fed to cut in September?  It seems the more proper question to be what it would take for the Fed to not cut.

Fed Chair Jay Powell clearly expressed that if economic data between now and the September 18 Fed meeting continues trend with recent data, or at least not getting worse, that the Fed will have enough confidence in the economy to start pulling back on its restrictive monetary policy, aka lowering rates.  Chair Powell said numerous times that the Fed looks at the totality of economic data and trends towards the goals of its dual mandate for price stability and maximum employment and will make policy decisions with this view.  Between now and the next Fed meeting we’ll get PCE inflation, two CPI inflation readings and two months of jobs data.  The Fed views that the risks to the economy of high inflation is now largely balanced with the risk of the labor market slowing too quickly.  For the past 12 months inflation risk has been the Fed’s primary concern.  The Fed noted the current economic landscape shows economic activity continues to expand at a solid pace, wage growth has eased over the past year and growth in consumer spending has slowed but remains solid.  Jay Powell and the Fed seem on track to give the market what it is looking for in a September rate cut.

From the US Bureau of Labor Statistics the labor market added 114,000 jobs during the month of July and the unemployment rate increased to 4.3%.  These figures are a disappointment to the labor market which has remained the strength of the economy for the past few years and finally is starting to show signs of decline in the face of the Fed’s tighter monetary policy.  The 114,000 job gains during the month is the lowest monthly figure since December 2020’s negative figure and is well below the average of 215,000 over the prior 12 months.  The 4.3% unemployment rate is the highest since October 2021’s 4.5% rate.  The unemployment rate is now 0.8% higher than it was a year ago, and the number of unemployed has increased from 5.9 million up to 7.2 million currently.  Gains in government jobs were muted in July, adding just 17,000 jobs compared to 70,000 added in June.  As previously noted, I do not view government job gains as sustainable real growth in the labor market.  Too many government jobs are really just another form of stimulus.  July average hourly earnings increased by 0.2% from the prior month and 3.6% from a year ago.  Job gains in the prior two months were revised lower by a cumulative 29,000 with a 27,000 lower revision to June’s previously reported gains.  This jobs report further supports the argument that the economy is slowing, and current monetary policy is overly restrictive.
 

^{The content of this publication is provided for informational purposes only and is not intended to recommend any financial decision or course of action.  Any financial and investment decision should be made in consultation with your financial advisors and representatives and should be evaluated at your own risk.}

Today brought the final major piece of economic data to the markets prior to next week’s Federal Reserve meeting and rate decision.  Another month of inflation data pointing to slowing price gains.  As reported by the Bureau of Economic Analysis headline PCE inflation grew by 2.5% from the prior year, which is a tick down from the prior month’s 2.6% annual pace.  Removing the more volatile food and energy prices, Core PCE grew by 2.6% over the past 12 months, which is the same pace of growth seen last month and slightly higher than expectations.  On a monthly basis the headline PCE gained 0.1% and Core PCE gained 0.2%.  Despite the slowing rate of price increases consumers are still feeling the pinch from cumulative years of gains in prices since the pandemic.  Also in the release this morning we saw that personal income is slowing, gaining just 0.2% from the prior month, half the gain seen in May, and personal spending came in at a 0.3% gain while the prior month was revised up to 0.4% from previously reported 0.2%.

Earlier this week the BEA also reported on US GDP growth for the second quarter of the year.  In this first estimate reported, GDP grew at 2.8% from the prior quarter, double the rate of growth seen in the first quarter.  GDP increased due to increases in private inventory investment along with an acceleration in consumer spending.  In line with the income and spending figures noted above in the PCE release, the GDP report showed that they personal savings rate slowed to 3.5% in the quarter from 3.8% in the prior quarter.
Also making headlines this week the NAR reported on home sales across the country.  New Home sales in the month of June slipped by 0.6% from the prior month and are 7.4% lower than the prior year.  Existing home sales rose to a new record price of $426,900 in June, the second consecutive month of a new record high and a 4.1% increase in the price levels seen a year ago.  However, the number of sale transactions declined by 5.4% from the prior year.

Looking ahead to the following week the FOMC rate decision comes Wednesday afternoon.  All expectations are for the Fed to hold rates at this meeting while setting the stage for a rate cut in September and outlining the path for future rate cuts.  Markets are currently pricing in these expectations, so we don’t see mortgage rates falling outside of a major market surprise from Fed Chair Jay Powell, who is famously cautious about his word choices.
 

^{The content of this publication is provided for informational purposes only and is not intended to recommend any financial decision or course of action.  Any financial and investment decision should be made in consultation with your financial advisors and representatives and should be evaluated at your own risk.}