Hello, my friends!
Nobody really knew what Federal Reserve Chair Jerome Powell was going to say prior to his speech on Friday at the central bank’s annual Jackson Hole Symposium. By the time he was finished, however, rate-cut-desperate markets were remarkably energized, euphoric over the chair’s half-hearted suggestion the Fed actually might get back to reducing rates next month.
After reiterating for the assembled that persistently low unemployment and moderating inflation have enabled Fed officials “to proceed carefully,” Powell delivered the punchline everyone was hoping to hear:
“Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
Still, that was as enthusiastic as Powell got during his speech when it came to embracing the prospect of a September rate cut. Indeed, the chair proceeded cautiously the rest of the way, emphasizing that “it will continue to take time for tariff increases to work their way through supply chains and distribution networks” and adding:
“Moreover, tariff rates continue to evolve, potentially prolonging the adjustment process.”
Nevertheless, Powell’s mere dangling of the possibility that rate cuts may resume was more than enough to set markets off and running. By the close of business on Friday, the Dow Jones Industrial Average had soared nearly 850 points to finish up 1.89% on the day. The tech-heavy Nasdaq Composite was a close second, jumping 1.88%, while the broad-based S&P 500 surged 1.52%.
Powell’s speech, and the market’s reaction TO it, went a long way to offsetting the weakness that had plagued the major indexes in preceding days. The Dow ended the week far and away the best performer of the “big three,” climbing 1.5%. As for the S&P 500, that rose 0.3%. The Nasdaq Composite fell 0.6%.
With so many observers now assuming a rate cut next month is a done deal, all the risks to the market lie squarely to its downside. As Chris Zaccarelli, chief investment officer at Northlight Asset Management, said on Friday:
“The bar is extremely high now for the Fed to leave rates unchanged in less than a month.”
In other news this week:
Fed Minutes Reveal Policymakers Were More Concerned About Inflation Than Looming Job Weakness Last Month
Exactly one week prior to Wednesday’s reveal of the minutes from the late-July Fed policy meeting, traders had the chances of a rate cut next month pegged at 100%. But shortly after the minutes were published, those odds had dropped to nearly 80%; still reasonably strong…but certainly not reflecting the same degree of confidence projected just days earlier.
So, what was it about the minutes that made traders suddenly less certain about the resumption of rate cuts in September?
Simple: Prevailing concerns among the members of the Federal Open Market Committee that higher inflation may be experiencing a rebirth against the backdrop of volatile White House trade policy.
“Regarding upside risks to inflation, participants pointed to the uncertain effects of tariffs and the possibility of inflation expectations becoming unanchored,” the minutes said.
Ultimately, the committee elected to once again keep the benchmark fed funds rate at the target range of 4.25% to 4.5%, where it’s been since December.
The decision wasn’t unanimous, however. Fed Governors Christopher Waller and Michelle Bowman each preferred to see a rate cut last month, believing the “downside risk to employment the more salient risk.” Notably, it was the first time in more than 30 years that multiple committee members voted against a rate decision.
The minutes indicated that while all policymakers seemed to give looming labor-market weakness a great deal of consideration, “a majority of participants judged the upside risk to inflation as the greater of these two risks.”
Jerome Powell’s tacit blessing given at Jackson Hole to the possibility of a September rate cut pushed the trader-generated odds we’ll see one back up near 90% by the weekend. But Waller and Bowman aside, a fair number of policymakers – including Powell himself – don’t seem so convinced just yet that tariff-vulnerable inflation will cooperate sufficiently to enable a reduction in rates.
All we – and they – can do is wait to see what sort of data the economy has in store for all of us in the weeks ahead.
S&P Global Flash PMIs Look Good This Month, but Rising Input Prices Suggest More Inflation Trouble Ahead
Also this week, S&P Global reported on Thursday that its Flash U.S. Composite Purchasing Managers Index grew at the fastest rate of the year in August. “Flash” PMIs are advance estimates of the final numbers that come out at the end of each month and are calculated using roughly 85% to 90% of the survey responses.
It turns out the index climbed to an eight-month high this month, rising 0.3 of a percentage point from July to land at 55.4. The metric’s strong showing is one more piece of evidence that U.S. businesses have thrived in the third quarter, despite the ongoing drumbeats warning of a possible downturn.
In fact, not only has overall output resided in expansion territory for 31 straight months, but the measures for July and August represent the strongest back-to-back expansions of output since spring 2022.
The upbeat results this month were driven primarily by the manufacturing sector. Flash U.S. Manufacturing PMI…a critical component of the broader index along with Flash U.S. Services PMI…leapt out of contraction territory this month, surging 3.5 points to come in at 53.3. That’s the highest reading for the manufacturing gauge in more than three years. Services PMI, which has remained above 50 for over two years, ticked down 0.3 of a percentage point this month to 55.4.
The news wasn’t all favorable, however. Businesses across both the manufacturing and services sectors reported the sharpest rise in input prices since May as well as the second-biggest increase in 2½ years.
In a particularly ominous assessment of the outlook for input prices, Chris Williamson, chief business economist at S&P Global Market Intelligence, warned:
“The resulting rise in selling prices for goods and services suggests that consumer price inflation will rise further above the Fed’s 2% target in the coming months. Indeed, combined with the upturn in business activity and hiring, the rise in prices signaled by the survey puts the PMI data more into rate hiking, rather than cutting, territory.
I telegraphed earlier that markets may be getting just a little ahead of themselves with their excitement over near-term rate-cut prospects. The battles now being fought by both goods and services producers to contain input prices is but one more reason to perhaps temper expectations.
Several Data Releases Reveal Housing Market Remains Mired in the Doldrums
Finally this week, we were treated to several updates on the condition of the housing market…each of which left the impression that while things may not be getting any worse in the nation’s residential real estate sector, neither are they improving in any material way.
First up was the Housing Market Index for August, released on Monday by the National Association of Home Builders (NAHB).
According to the data, the index – which measures homebuilder sentiment on a scale of zero to 100 – declined one point this month to come in at 32. Economists had expected the metric to come in at a modestly improved 34.
Since May, the index has remained within a narrow range of 32 and 34, which is the lowest level reached by the metric in 2½ years. What’s more, August marks the 16th month in a row the index has landed below the key level of 50 that distinguishes greater pessimism from greater optimism among homebuilders.
The following day, Tuesday, the Census Bureau reported what at first blush seemed like good news about housing starts last month: New residential construction landed at a seasonally adjusted annual rate of 1.43 million units, which translates to a healthy increase of 5.2% on a monthly basis and 12.9% on an annual basis.
But a more complete review of the Census Bureau’s report suggests last month’s relatively robust activity may not be the beginning of a big turnaround. That’s because the data also showed that permits, which are signs of future construction, sank 2.8% from June and 5.7% year over year.
Additionally, despite the solid move higher last month, housing starts continue to languish at a level more than 20% below where they were three years ago.
Rounding out the week’s housing data were the numbers for existing-home sales in July, released on Thursday by the National Association of Realtors.
The NAR’s report showed that sales of previously owned homes climbed 2% from June, landing at a seasonally adjusted annual rate of 4.01 million units. But while the July result was an improvement over the prior month, sales remain mired at a level nearly 40% below where they were at four years ago.
As for the culprits of the overall anemic numbers, they haven’t changed.
“Affordability continues to be the top challenge for the housing market and buyers are waiting for mortgage rates to drop to move forward,” said NAHB Chairman Buddy Hughes, a home builder and developer from Lexington, N.C.
That’s all for now; have a great weekend!
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