Possible Rate Cut: Key factors
Macroeconomic Complexity and Possible Rate Cut in September
Recently, the complexity of the macroeconomic environment has made it difficult for the Federal Reserve (Fed) to maintain stable inflation and full employment. The Fed faces a dilemma: waiting too long could weaken economic growth, while a premature rate cut could impact the progress in inflation. However, the latest data suggests that a rate cut in September (and perhaps later) could be imminent. Key factors include:
Slowdown in job creation
- Consumer confidence in decline: More and more people believe it’s difficult to find a job, reflecting growing pessimism about the job market.
- Less job openings: Vacancies have decreased from 12 million to 8.2 million, indicating less pressure in the market.
- Hiring Slowed: In July, only 114 thousand new jobs were created, the lowest number since December 2020, with unemployment rising to 4.3%, the highest level since October 2021.
Cooling of inflation
- Lower wage pressure: Wages continued to grow at a slower pace in the second quarter, with the lowest increase since December 2021, according to the Employment Cost Index.
- Pricing difficulties: Companies like Procter & Gamble and McDonald’s have found it difficult to pass on cost increases to consumers, suggesting a weakening in their pricing power.
- Increase in productivity: Technological advances, such as artificial intelligence, are boosting productivity, which could help to control labor costs and support disinflation.
Weakness in interest rate sensitive areas
- Manufacture: The ISM Purchasing Managers’ Index (PMI) has been in contraction in 20 of the last 21 months, signaling weak demand and less new orders.
- Housing Market: High mortgage rates continue to impact home sales and builder confidence, with affordability at low levels.
- Automotive Industry: High financing costs and elevated prices are challenging the automotive sector, increasing sales incentives and competition.
In this scenario, the argument for an interest rate cut strengthens, supported by Jerome Powell’s more moderate comments in the latest Fed statement. Although the economy appears to be heading toward a soft landing, future economic data is likely to remain weak, which could increase volatility in the markets.
Federal Funds rate cut expectations.
Source: Raymond James
The perfect storm forms for a day: Expectations rise towards the Fed.
By: Bernardo Trejo, Equity Specialist
After Monday’s volatility, the markets took a breath, influenced by several factors: low employment rate in the U.S., an interest rate hike in Japan, geopolitical tensions in the Middle East and disappointing reports from some tech companies. However, the markets seem to digest the situation better.
Despite July’s low employment rate, job creation continues, yet at a slower pace, and positive economic growth is expected this year despite a slowdown. In this context, the main Japanese index recovered much of the ground lost on Monday, and indices in the U.S. also showed signs of recovery.
The expectation of a more aggressive Fed rate cut in September and the rest of the year has been strengthened. This could end the cycle of high interest rates and steer U.S. monetary policy towards greater stability following the economic effects of the pandemic. Undoubtedly, this shift should improve the environment for the markets and provide an extra boost to the economy to prevent a recession.
In conclusion, although we may see more episodes of volatility as new economic data emerges, this environment of hypersensitivity leads us to maintain caution, restraint, and patience. Staying informed and adhering to a long-term strategy will be crucial for navigating these times.
Global Volatility: Impact of rate hikes in Japan and markets perspective.
By Jose Cova, Portfolio Manager Director
Yesterday, the stock market experienced notable volatility, driven by the recent interest rate hikes by the Bank of Japan (BoJ). This decision had a strong impact on the value of the Yen, which has seen significant appreciation.
For years, negative interest rates in Japan fostered a massive “carry trade” (estimated at $1 trillion, according to Deutsche Bank). In this scheme, investors took low-cost local bank loans to finance the purchase of both foreign and domestic assets. However, with rising inflation and wage pressures, the BoJ was forced to increase interest rates, leading to a strong rise of the Yen.
This appreciation of the yen has triggered a reversal in the carry trade, where the investors are selling their assets and repaying their yen-denominated loans, as maintaining these positions has become less profitable. This reversal has led to a correction in global stock markets. Despite this volatility, stocks in the U.S., Europe, Japan, and emerging markets still show gains so far this year.
Looking forward, it is likely that we’ll continue to see volatility in the markets. This is partly due to the ongoing release of weak economic data in the United States, which creates uncertainty about how the Federal Reserve (Fed) will respond. The economic outlook in the U.S. is mixed: Although business and consumer spending, as well as corporate profits, remain relatively strong, some indicators suggest a possible recession.
In summary, the current environment requires caution and a well-grounded strategy to navigate market turbulence. Staying informed and attentive to economic developments will be crucial in the upcoming months.