Ok, so last week when I said we expected volatility in the markets I wasn’t expecting to be right so quickly. And no, that is not a humble brag! Last week was apparently the worst week since 2022, which was a notably terrible year across all major asset classes. As if anyone remembers that far back! As the markets briefly roiled last week, I did have to crack up about the “financial” headlines, or should I just call them clickbait? I’ll spare you the misery of rehashing the ways they tried to frame the same data and news in different ways. Instead, let’s move on.
Do you remember way back in July when the market was freaking out because the jobs market was TOO strong, and the FED couldn’t cut rates until the job market weakened? Well, that’s not an issue anymore. In fact, you can see that the jobs revisions that we discussed a couple of weeks ago have had a huge effect on the monthly numbers. See the chart below.
That’s almost a 31% lower revision for payrolls. I think it’s fair to assume that August payrolls will be revised down as well next month. We might print a second consecutive month of sub-100,000 new jobs. Nothing says slowdown and recession like that!
Now some firms are completely changing their outlook on interest rates. HSBC is looking for 3% of total interest rate cuts!
Here’s the headline of another article.
Ok, so let’s not get ahead of ourselves. Please tell me we are not in a ‘New Era of Easy Money’! That would be a bad thing in my opinion. We don’t need ‘Easy Money.’ We need ‘balanced money.’ Balanced to support growth, while not allowing inflation to come back in a bad way
Below is a view of the current yield curve. You can see that it is extremely inverted on the short end of the curve, while the 2yr/10yr has finally uninverted (which apparently isn’t a word according to spell check…but I’m sticking with it!).
You can see that normalization in the chart below.
A couple years ago as money market interest rates were vastly better than bank savings rates (still are by the way), we recommended excess saving be put in higher yielding money markets. Today, while money markets will still be yielding more than bank savings rates, you will see money market rates come down significantly over the next 6-12 months. Those funds might need a new home.
If you review the yield curve earlier, you can see that as the FED lowers interest rates, it will directly affect short maturities. I would expect to see money market rates at 3% or lower in the next 12 months. In fact, before the FED has started to cut rates, money market rates are already starting to come down.
Our good friend Professor Siegel, Senior Economist to WisdomTree, is arguing for a more aggressive cut next week (click on the image to expand and make it legible!).
I’m not sure how we get to 4% in one meeting. Furthermore, the market is still only expecting one 25 basis point cut.
And this is why the market is so jittery. 25 basis points is not enough, but the market is not ready for 50 or 75 basis points. Also, if the FED cuts 50 or 75 basis points, what does that say about their opinion of the economy? Would that cause the market to freak out even more because the FED is saying things are much worse than previously thought? Possibly.
It takes the right cut AND the right message. The message this month would be a lot easier if they would have cut 25 basis points in July, in my humble opinion. Now you’re going from potentially more interest rate hikes a few months ago to potentially cutting over 1% the rest of this year. That’s a huge change and one of the reasons that a policy mistake is very possible.
Next week might be the most important FED meeting in a long time. I do happen to agree with Professor Siegel in being a bit more on the aggressive side but stressing the fact that the FED has been overly tight and are now going to quickly get to a neutral rate (NOT EASY MONEY). Here is Jerome Powell’s press conference: “No need to worry…We’re not panicking…Everything is under control, we’re on the job…We’ve slowed the economy so we could get back to neutral rates…And there’s no need to slow walk getting there…” BAM! Just like that. I will now be accepting your nomination for the next FED Chairman, or at least spokesperson!
If you have questions, please reach out and we are all happy to have a conversation. I hope you have a good week.