Weekly Economic Update: July 10, 2024

Presented by Nicholas Wealth Management

September Surprise?

Market trading was dramatically curtailed last week with an early close on Wednesday and markets closed for the Fourth of July holiday on Thursday. Friday was muted, but a lot went on despite the shortened week and light trading.

Federal Reserve Chair Jerome Powell spoke in Portugal last week. He said he was encouraged by April and May inflation data and that the data “do suggest we are getting back on a disinflationary path.” He went on to say that, despite that encouragement, it was too early to cut until the Fed sees further progress toward its 2% target.

We may get further confirmation this coming week when June Consumer Price Index (CPI) and Producer Price Index (PPI) are reported. If the numbers cooperate, that will be yet another signal the market is looking for to move upward from here.

With the market at record levels (more in the next section), the narrowness of the market could broaden as the pressure from interest rates eases. Rate cuts have been expected all year, and the Fed has constantly dampened those expectations, yet markets have weathered higher rates. Once we get on the front foot with rate cuts, we will likely see the rest of the market push upward to match the handful of tech high-flyers that have driven the indices to record levels.

That’s the base case, and in that case, we expect a cut in September, which the Fed hasn’t officially confirmed. In fact, the only signal we’ve seen thus far has been the latest dot plot confirmation of a cut in November or December. The CME FedWatch tool is showing a 71% chance of a 25-basis-point (0.25%) cut at the September meeting. If the data isn’t cooperating and we don’t get a cut, markets may not take the news like they did the last two times rate cut expectations had to be managed downward.

The timing of the meeting is also important. Remember, September and October are historically volatile months — good and bad, sometimes very bad. This is also an election year, and it’s stacking up to be very bizarre.

Finally, there is the ever-present possibility of geopolitics impacting the markets, especially given the distractions from the politics here at home. The bottom line is that Powell wants to cut, but he needs a few more data points. It doesn’t seem as though he needs to see inflation hit 2% before the Fed cuts; if we see CPI under 3%, he will probably consider 2-ish the new 2% and start cuts in September. If we don’t, the markets could have a rough September and October.

Unemployment rises, keeps soft landing in play

The ADP employment report came in slightly below consensus (150,000 vs. 161,000) on Wednesday. And although the Bureau of Labor Statistics (BLS) June employment summary was slightly higher than consensus (206,000 vs. 189,000), the unemployment rate ticked up from 4.0% to 4.1%.

The new jobs were concentrated in government and health care (highly subsidized by the government). These sectors aren’t consistent with broad economic growth, and if the government pulls back, that growth will evaporate.

The uptick in unemployment might be just the excuse the Fed needs to start easing rates. Let’s remember that gross domestic product (GDP) was 1.4% in the first quarter and now we see unemployment over 4%. That’s the kind of news equity markets have been waiting for, and we finished last week at new record highs for the S&P 500 and Nasdaq.

The Dow didn’t participate in the festivities, but we have discussed that index’s quirks before. The Dow touched 40,000 on May 17 but trailed off with one or two names at various times, holding the index back. Let’s face it: It’s dramatic to see the Dow shoot up or dive 1,000 points in a day, but it doesn’t have the relevance of the S&P 500 or Nasdaq anymore.

Markets are poised for the next leg up as the pressure on the Fed is clear. Unemployment is going up, economic growth is slowing, and this is a clear opportunity for the Fed to engineer that elusive soft landing. If such a thing is possible, now is the time for it. Otherwise, the Fed risks waiting too long, and we run the real chance of stumbling into a recession.

Coming This Week

• The data never stops even though things slow down for summer. After a shortened trading week provided some record closes on the S&P 500 and Nasdaq, we’ll be watching the data that will hopefully bolster the narrative of rate cuts in September.
• Wednesday will feature MBA mortgage applications and wholesale inventories.
• The real action will be at the end of this week, with CPI and Core CPI on Thursday. CPI was 3.4% in May, so markets will be looking for a further decline. We finish the week with PPI and Core PPI, which was 2.2% year-over-year in May. Again, we’re looking for improvements to keep the rate-cut drumbeat going.

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