by Hubert Marleau, Market Economist, Palos Management
September 13, 2024
The Fed will begin its latest 2-day meeting on September 18, at which time itās expected to start a new rate-cut cycle, while the prospect of higher earnings is encouraging. Firstly, The CMEās FedWatch tool says that bond traders are putting a probability of 100% that the Fed will make a move, of which 53% call for a quarter point cut and 47% for half a point: a close one. Secondly, producer prices have risen slower than consumer prices, suggesting that profit margins are holding up. Then there is the sexy lineup of big tech: all factors that may partially explain why the S&P 500 registered a weekly gain of 4.0% to close at 5626 on Friday. Iām still maintaining that we shall see 5850 before the year ends.
What is remarkable is the behaviour of the misery index, which with the addition of the unemployment rate (4.2%) and inflation (2.5%), currently stands at only 6.7. This is close to perfection, being 6.5, and down from 15.5 in February 2021, and has occured without incurring a recession. Based on recent data, this process of disinflation and employment expansion has slowed down, but not enough to suggest that recessionary pressures are about to erupt. NowCasting models are predicting that the economy advanced 2.5% in Q3, according to the Atlanta Fed and, according to the NY Fed, by another 2.2% in Q4. Meanwhile, the swap market has determined that inflation expectation is well anchored around 2.0%.
I acknowledge that the Fed has been assiduous, skillful and competent in its effort to normalise the path of the economy. Nonetheless, it has been blessed with a lucky commander. Napoleon Bonaparte was right when he said: āI would rather have a general who was lucky than one who was good.ā In this regard, Fed Chairman Powell has had the tremendous aid of massive immigration that raised the supply of workers; an explosion in hyperscale AI that lifted capital spending; and a productivity boom that heightened operating efficiency. Over time, many hard-liner economists have steadily backed off their recession calls, pivoting to the soft landing scenario instead.
Meanwhile, the stock market has had the good fortune of getting what it likes, rising bit by bit, month by month, year by year to a seemingly endless sequence of new all-time highs.
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