Weekly Market Update: September 9, 2024
The stage appears set for the Federal Reserve to begin reducing the federal funds rate at next week’s two-day monetary policy meeting. At last month’s Economic Symposium in Jackson Hole, Wyoming, Chairman Jerome Powell said that an interest-rate cut was likely, especially if inflation continues to ease. On point, the latest Personal Consumption Expenditures (PCE) Price Index, the assessment of inflation most closely watched by the Fed, came in as forecast, with the core PCE figure moving closer to the lead bank’s target rate of 2%.
The central bank also is keeping a close eye on the labor market. The Fed doesn’t want to keep monetary policy too restrictive for too long and risk a sharp deterioration in labor market conditions. This could jeopardize the Fed’s goal of producing a “soft landing” for the economy. The jobs data of late have been mixed. Initial weekly jobless claims remain at a level indicative of a tight labor market, but monthly job creation figures have been revised sharply lower on several occasions this year, and the unemployment rate continues to move steadily higher. Investors should note that the August employment report was due to be released shortly after we went to press.
Meantime, the recent changes in the Treasury yield curve bear watching. Since sentiment heavily shifted to the Fed soon pivoting on the monetary policy front, the yield spread between the two and 10-year Treasury notes has narrowed considerably. The yield curve generally does normalize just before heading into recessions as traders begin to price in the likelihood that the Federal Reserve will have to start lowering interest rates as a way to battle the economic slowdown. The health of the economy will likely depend on the U.S. consumer sector, which, as reflected by July gains in retail spending, durable goods orders and personal spending, has proven resilient. However, these gains may have come at a price, as data show that consumer credit card debt jumped to a record $1.14 trillion in the second quarter, and loan delinquencies are rising.
Conclusion: The U.S. stock market may experience some increased volatility in September, a month that has historically been the worst for stocks. Thus, we continue to recommend a portfolio led by high-quality stocks, as investors are still faced with uncertainty about the economy, global geopolitical unrest, and a Presidential election this November.
Source: ValueLine.com
