Market Monitor: September Mid-Month Update
Headlines and Highlights
- Fed cuts interest rate as inflation recedes: The Federal Reserve lowered its benchmark interest rate from 5.25% to 4.75% Wednesday, opting for an aggressive move in its first rate cut in four years. It was a long-awaited pivot as global central banks begin unwinding their restrictive monetary policies. The Fed move comes after the consumer price index sank to 2.5% in August from 2.9% in July, inching closer to the 2% target. Holding the borrowing rate at a two-decade high has put strain on a resilient but slowing economy. Retail sales, which represent about a third of all consumer spending, are up a modest 2.1% in the past year after edging up 0.1% in August. That is down significantly from an average of about 3.6% before the pandemic.
- Labor market cools as economy slows: More signs have emerged of a softening labor market, which has helped tame inflation but is raising concerns about an economic slowdown. Wage growth is declining, job openings have tumbled to a more than three-year low since the beginning of last year, layoffs are up slightly, and unemployment climbed above 4% this summer. Employers’ addition of 142,000 jobs last month testifies to a still-healthy market, but it has become more vulnerable and the Fed wants to halt the decline.
- Bonds extend summer surge; stocks decline: Bond investments continue to outperform, benefiting from declining yields and investors’ quest for safer havens as the stock-market rally tapers off. After a negative first half, Altair’s benchmark for the taxable bond market has risen about 5.7% so far in the third quarter as yields decline. (Bond prices rise as yields fall). The municipal bond benchmark is up a more modest 2.4% this quarter. Most stock indexes are down this month, trimming quarterly and year-to-date gains, with economic softening a growing worry. The S&P 500 was down 0.2% to start the month, lowering its 2024 return to 19.3%.
Chart of Interest
Tighter job market: Openings have fallen from 10+ million last year to 7.67 million in July.
Sources: Federal Reserve Bank of St. Louis, Altair Advisers
Key Takeaways
- We expect the Federal Reserve to make a consecutive series of smaller cuts reducing the federal funds rate to below 4.5% by year-end and under 4.0% in 2025. Economic data remains strong enough that the cuts should increase the likelihood that the economy achieves a soft landing, avoiding recession.
- Consumer sentiment has risen to a four-month high, according to the University of Michigan’s monthly survey, reflecting relief at declining inflation and the prospect of lower borrowing rates. Yet a separate survey by the New York Fed showed consumers more worried about their ability to meet debt payments than at any time since 2020 as they rely increasingly on credit cards – a warning sign for the economy. Credit-card delinquency is at its highest rate in over a decade.
- The Magnificent Seven stocks that powered the stock market with an average 55% return in the first half were flat (0%) in the third quarter with only two weeks of trading remaining, a sign investors’ enthusiasm for artificial intelligence is waning. Real estate stocks have dramatically outperformed technology, however, due to an expectation of lower rates ahead. The Vanguard REIT Index began the week up 17.6% this quarter and 14.0% for the year.
- Bond yields across the world have fallen sharply as central banks set a course for lower interest rates. The U.S. 10-year Treasury yield, which briefly touched 5% less than a year ago, has declined near a 16-month low at 3.7%.
- China’s economic growth outlook worsened with the release of data showing disappointing numbers for retail sales, industrial production and urban investment. The world’s second-biggest economy continues to recover more slowly than expected from the COVID-19 pandemic.
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