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With no major economic report catalysts to compel the stock market one way or the other this morning, we turn to the World Economic Symposium in Jackson Hole, WY. Think of this as sort of an American Davos, where economic leaders from across the globe join together to discuss the most pressing issues of the day and forecast through the end of the year.
Pre-market futures are starting to buy in somewhat, following Thursday’s trading session, which took a modicum of risk off the table ahead of Fed Chair Jerome Powell’s speech at Jackson Hole this morning at 10am ET. The Dow is currently +175 points, +0.43%, the Nasdaq +162 points, +0.83%, the S&P 500 +0.56% and the small-cap Russell 2000 +0.50%.
Bond yields over the past several days have remained fairly flat, but are back down somewhat this morning: the 10-year is 3.837% and the 2-year 3.996% at this moment. We look for whether the inversion of these bond yields will take place once the Fed cuts rates at its September 18th meeting, and whether both will head further down toward 3%.
A Brief History of Recent Interest Rate Cuts
Going back a quarter-century or so, we see interest rates above +5% are relatively rare. Some of the reasons we’ve spent more time well below 5% have had to do with a few “once in a lifetime” events, such as the financial crisis of 2008-09 (which began pulling rates below 5% a year earlier than the fallout: Sept. 2007) and the “dot-com bust” in the spring of 2001, which pulled below 5% in April of that year. (Rates were already lower than 5% during 9/11 and the Covid pandemic.)
In both those cases, the Fed removed 50 basis points (bps) from the Fed funds rate — not 25 bps. The last time rates were brought lower than 5% by 25 bps was back in November of ’98, when financial collapses in regions of Asia led to a global slowdown. That was back when Bill Clinton was still president, and Alan Greenspan the Fed Chair.
What Will the Fed Do: Cut by 25 bps or 50 bps?
Will there be a 50 bps cut this time, as well? Based on the cautious tack Powell has taken both before raising rates this cycle, the answer would appear to be: “No. Expect a 25 bps cut.” ([Iin]famously, at the Jackson Hole Symposium in August 2021, Powell stated that inflation was merely “transitory.” This led the Fed to wait until March of the next year to bring rates up, after inflation was burning through the economy like a wildfire with supply chain disturbances and gluts of demand.)
September 18th is still three and a half weeks away. During that time, we’ll see new Personal Consumption Expenditures (PCE), the August Employment Situation, Consumer Price Inflation (CPI), Durable Goods Orders, etc., etc. Earlier this week, we did see a self-audit from the Bureau of Labor Statistics (BLS) that showed -818K fewer jobs created between April 2023 and March 2024 than originally reported.
Combined with monthly jobs numbers that are mere tens of thousands ahead of perceived retirement rates (the youngest of the Baby Boomers are turning 65 soon), the labor market has taken on increased importance in the Fed’s consideration of its dual mandate (controlled inflation and full employment). Thus, keep a close eye on what coming employment figures arrive at. If they remain in the 150-175K range or lower, this would likely increase the chances of a 50 bps cut.
New Home Sales for July Report Expected
Finally, New Home Sales will come out at 10am this morning, just as Fed Chair Powell takes the podium. Expectations are to come up from 2024 lows last month to 620K. This is still pretty weak gruel. Even as homebuilders like Toll Brothers (TOL - Free Report) and KB Home (KBH - Free Report) make up supply for historically low Existing Homes on the market, it’s still a low level of sales — not at 5-year lows, but but far above it.
Again, until interest rates come down, don’t expect a marked improvement in this data. But both new and existing home sales should pick up (and help the economy) once bank rates start coming down, which will lead to lower mortgage rates.
Image: Bigstock
How Important Is Powell's Speech at Jackson Hole?
Friday, August 23rd, 2024
With no major economic report catalysts to compel the stock market one way or the other this morning, we turn to the World Economic Symposium in Jackson Hole, WY. Think of this as sort of an American Davos, where economic leaders from across the globe join together to discuss the most pressing issues of the day and forecast through the end of the year.
Pre-market futures are starting to buy in somewhat, following Thursday’s trading session, which took a modicum of risk off the table ahead of Fed Chair Jerome Powell’s speech at Jackson Hole this morning at 10am ET. The Dow is currently +175 points, +0.43%, the Nasdaq +162 points, +0.83%, the S&P 500 +0.56% and the small-cap Russell 2000 +0.50%.
Bond yields over the past several days have remained fairly flat, but are back down somewhat this morning: the 10-year is 3.837% and the 2-year 3.996% at this moment. We look for whether the inversion of these bond yields will take place once the Fed cuts rates at its September 18th meeting, and whether both will head further down toward 3%.
A Brief History of Recent Interest Rate Cuts
Going back a quarter-century or so, we see interest rates above +5% are relatively rare. Some of the reasons we’ve spent more time well below 5% have had to do with a few “once in a lifetime” events, such as the financial crisis of 2008-09 (which began pulling rates below 5% a year earlier than the fallout: Sept. 2007) and the “dot-com bust” in the spring of 2001, which pulled below 5% in April of that year. (Rates were already lower than 5% during 9/11 and the Covid pandemic.)
In both those cases, the Fed removed 50 basis points (bps) from the Fed funds rate — not 25 bps. The last time rates were brought lower than 5% by 25 bps was back in November of ’98, when financial collapses in regions of Asia led to a global slowdown. That was back when Bill Clinton was still president, and Alan Greenspan the Fed Chair.
What Will the Fed Do: Cut by 25 bps or 50 bps?
Will there be a 50 bps cut this time, as well? Based on the cautious tack Powell has taken both before raising rates this cycle, the answer would appear to be: “No. Expect a 25 bps cut.” ([Iin]famously, at the Jackson Hole Symposium in August 2021, Powell stated that inflation was merely “transitory.” This led the Fed to wait until March of the next year to bring rates up, after inflation was burning through the economy like a wildfire with supply chain disturbances and gluts of demand.)
September 18th is still three and a half weeks away. During that time, we’ll see new Personal Consumption Expenditures (PCE), the August Employment Situation, Consumer Price Inflation (CPI), Durable Goods Orders, etc., etc. Earlier this week, we did see a self-audit from the Bureau of Labor Statistics (BLS) that showed -818K fewer jobs created between April 2023 and March 2024 than originally reported.
Combined with monthly jobs numbers that are mere tens of thousands ahead of perceived retirement rates (the youngest of the Baby Boomers are turning 65 soon), the labor market has taken on increased importance in the Fed’s consideration of its dual mandate (controlled inflation and full employment). Thus, keep a close eye on what coming employment figures arrive at. If they remain in the 150-175K range or lower, this would likely increase the chances of a 50 bps cut.
New Home Sales for July Report Expected
Finally, New Home Sales will come out at 10am this morning, just as Fed Chair Powell takes the podium. Expectations are to come up from 2024 lows last month to 620K. This is still pretty weak gruel. Even as homebuilders like Toll Brothers (TOL - Free Report) and KB Home (KBH - Free Report) make up supply for historically low Existing Homes on the market, it’s still a low level of sales — not at 5-year lows, but but far above it.
Again, until interest rates come down, don’t expect a marked improvement in this data. But both new and existing home sales should pick up (and help the economy) once bank rates start coming down, which will lead to lower mortgage rates.
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