Pre-market activity is a tad disjointed this morning. While the Dow is currently up +113 points at this hour, the Nasdaq is -91 and the S&P 500 is splitting the difference at -3 points. Bond yields on Treasury bonds are at two-year lows on the 2-year: 3.530%, and at 15-month lows on the 10-year, 3.625%.
This Week’s Big Moment for Stocks: Cutting Fed Funds Rate
The big moment of this trading week happens at its midpoint: the Fed decision on interest rates at the Federal Open Market Committee (FOMC) meeting, which concludes this Wednesday afternoon. The Fed has not cut rates since drawing them all the way back to 0-0.25%, -100 basis points (bps), at the start of the Covid pandemic in March 2020.
Since then — or, rather, since about a half year after economists and analysts were calling for the Fed to even-out inflation during supply shortages, post-Covid — the Fed has grown interest rates levels steadily from March 2022 through July 2023 by a total of 525 bps. The current 5.25-5.50% is the highest Fed funds rate in a generation: the last time we were this high was March 2001.
With inflation data across the board describing a muted environment, matched with a weakening labor force that is barely keeping pace with retiring Baby Boomers, analysts, economists and regular everyday stock traders all see a Fed rate cut coming Wednesday.
Fed Rate Cut: 25 bps or 50 bps?
In all honesty, the data coming in this month has not given a clear picture on whether the Fed should cut by a quarter-point or a half-point. That’s because for every clear sign the economy is taking a step backward — in monthly jobs numbers, for instance — we’re still seeing some relative strength among the American consumer. Last week’s Inflation Rate came in at +2.5% — within range of the Fed’s optimum level of 2%, but not quite there yet.
The case for 25 bps is that successive FOMC meetings in November and December may allow for further gradual downgrades to the Fed funds rate. We’d be beneath +5% for the first time in a year and a half with three quarter-point cuts from now til the end of the year.
The case for 50 bps comes from those in the market who feel the Fed is again late to move, and should take firmer action to drive down interest rates which may further erode the economy into recession. Current data does not depict a recession imminent, although if jobs numbers continue to get worse at their current rate, this could be the biggest red flag in the economy.
Empire State Index: Highest Level of the Year
The latest Empire State Manufacturing Survey for September is out this morning, and count this as a notch in the 25 bps cut column: at a headline print of 11.5, it’s the first non-negative print since November of last year, and the strongest manufacturing figure in New York State since April of 2022. Expectations had been for -5.0, beneath the unrevised -4.7 reported for August.
Other Economic Reports This Week
Aside from the FOMC meeting, which begins tomorrow and concludes with a press conference with Fed Chair Jerome Powell at 2:30 pm ET Wednesday, we’ll see plenty of economic data releases elsewhere: Tuesday brings us U.S. Retail Sales, Industrial Production/Capacity Utilization, Business Inventories and Homebuilder Confidence; Wednesday morning has Housing Starts and Building Permits; and Thursday offers Weekly Jobless Claims, a new Philly Fed survey, Existing Home Sales and Economic Indicators.
Pre-market activity is a tad disjointed this morning. While the Dow is currently up +113 points at this hour, the Nasdaq is -91 and the S&P 500 is splitting the difference at -3 points. Bond yields on Treasury bonds are at two-year lows on the 2-year: 3.530%, and at 15-month lows on the 10-year, 3.625%.
This Week’s Big Moment for Stocks: Cutting Fed Funds Rate
The big moment of this trading week happens at its midpoint: the Fed decision on interest rates at the Federal Open Market Committee (FOMC) meeting, which concludes this Wednesday afternoon. The Fed has not cut rates since drawing them all the way back to 0-0.25%, -100 basis points (bps), at the start of the Covid pandemic in March 2020.
Since then — or, rather, since about a half year after economists and analysts were calling for the Fed to even-out inflation during supply shortages, post-Covid — the Fed has grown interest rates levels steadily from March 2022 through July 2023 by a total of 525 bps. The current 5.25-5.50% is the highest Fed funds rate in a generation: the last time we were this high was March 2001.
With inflation data across the board describing a muted environment, matched with a weakening labor force that is barely keeping pace with retiring Baby Boomers, analysts, economists and regular everyday stock traders all see a Fed rate cut coming Wednesday.
Fed Rate Cut: 25 bps or 50 bps?
In all honesty, the data coming in this month has not given a clear picture on whether the Fed should cut by a quarter-point or a half-point. That’s because for every clear sign the economy is taking a step backward — in monthly jobs numbers, for instance — we’re still seeing some relative strength among the American consumer. Last week’s Inflation Rate came in at +2.5% — within range of the Fed’s optimum level of 2%, but not quite there yet.
The case for 25 bps is that successive FOMC meetings in November and December may allow for further gradual downgrades to the Fed funds rate. We’d be beneath +5% for the first time in a year and a half with three quarter-point cuts from now til the end of the year.
The case for 50 bps comes from those in the market who feel the Fed is again late to move, and should take firmer action to drive down interest rates which may further erode the economy into recession. Current data does not depict a recession imminent, although if jobs numbers continue to get worse at their current rate, this could be the biggest red flag in the economy.
Empire State Index: Highest Level of the Year
The latest Empire State Manufacturing Survey for September is out this morning, and count this as a notch in the 25 bps cut column: at a headline print of 11.5, it’s the first non-negative print since November of last year, and the strongest manufacturing figure in New York State since April of 2022. Expectations had been for -5.0, beneath the unrevised -4.7 reported for August.
Other Economic Reports This Week
Aside from the FOMC meeting, which begins tomorrow and concludes with a press conference with Fed Chair Jerome Powell at 2:30 pm ET Wednesday, we’ll see plenty of economic data releases elsewhere: Tuesday brings us U.S. Retail Sales, Industrial Production/Capacity Utilization, Business Inventories and Homebuilder Confidence; Wednesday morning has Housing Starts and Building Permits; and Thursday offers Weekly Jobless Claims, a new Philly Fed survey, Existing Home Sales and Economic Indicators.