[Outlook] UNSTOPPABLE

What Does the Fed Know That We Don’t Know? UNSTOPPABLE What Does the Fed Know That We Don’t Know? By Donn Goodman September 22, 2024 Welcome back readers. Hope you had a profitable week in the markets. The Fed pulls the trigger. In the last two Market Outlooks we expressed our strong belief that the Fed would lower the overnight lending rate at their upcoming Fed meeting which occurred last Wednesday. If you have not had a chance to read last week’s Market Outlook, [you may do so by going here](=). We suggested the Fed would do no more than a 25-basis point reduction. I was wrong. Early in the week the “betting pools” had risen to over 50% that the Fed would lower by 50 basis points. My estimation was based on “sticky inflation” and the Fed taking an initial cautionary easing. We provided evidence over the past few weeks by showing graphs illustrating how large the spread between the downward trending inflation and short-term (2-10) year Treasury paper has become. Reason enough for the Fed to take action. Most economists felt that the Fed had to reduce their restrictive stance and send a strong message to the market that the easing cycle is now beginning. No doubt 50 basis points did exactly that. What Does the Fed know? Besides the historically widespread (between the rate of inflation and the Treasury market as discussed above), the Fed is acutely aware that job growth is slowing, and that GDP has trended down over the past few quarters. They understand all too well that this soft landing could easily turn into a full blown recession if rates stay too restrictive. Was this big of a cut necessary: Fed vs. financial conditions. "The last time the Fed cut this much when financial conditions were set this fair was way back in 1992." There are plenty of pundits who believe there is a real recession risk, which is why the futures betting market had odds by Wednesday morning of greater than a 65% chance the Fed was cutting by 50 basis points. Jobs, jobs and jobs. You may recall back in July the jobs report came out well below expectations. Then in August the Labor Department adjusted job growth by -800,000+ jobs that were not created. The final adjustment in September, along with the previous revision, stated that over 1,000,000 jobs were NOT created as the BLS reduced job growth substantially. THIS IS WHAT THE FED took into significant consideration when determining to lower rates and do so by 50 basis points. Remember that part of the Fed’s dual mandate is for a stable job market. Seeing signs that unemployment may jump up fairly quickly, motivated the Fed’s aggressive lowering action and rhetoric about more to come that followed. Here is a description followed by charts depicting this unemployment situation: "The median monetary policymaker thinks the unemployment rate (currently 4.2%) will be at 4.4% at the end of this year and the next ... Twelve monetary policymakers think the risk is that the unemployment rate goes up even more than they expect." Global growth is weakening. While the US Federal Reserve was lowering rates, other countries Central Bankers have been doing the same. The mantra amongst most developed countries is to ease interest rates and hope for soft landings in their respective economies. I guess if you had to look at the collective pattern, all countries emerged out of Covid by over stimulating their economies and some of that sugar high has completely worn off now. But most countries including our own are hoping for a “soft landing”. Let’s hope that our economy accomplishes this without too many hardships. See below Despite pessimistic views on the global economic growth over the next 12 months (net 42% expect weaker, top chart), a 'soft landing' is increasingly seen as the most likely outcome (bottom). While Banc of America above provides ammunition that 79% say we will experience a soft landing, The consensus provided above however, is not in alignment with the interest rate markets. See chart below: Rates market vs. FFR. "Despite surveys showing that the consensus is expecting a soft landing, rates markets are pricing in a full-blown recession." There are others too who are skeptical of a “soft landing”. One of those outspoken that we may see harder times ahead is Jame Dimon, CEO of JP Morgan. In recent speeches he has been highly critical that the Fed’s restrictive monetary posture went on for far too long and may be putting the US in a position to endure a “hard landing, aka a recession” in the near future. Mr. Dimon said he remains skeptical about a soft landing in the US following the Federal Reserve’s first rate cut in more than four years. He said at the Atlantic Federal event in Washington on Friday that “he wouldn’t count my eggs” on that outcome. He went on to say “I am a little more skeptical than other people. I give it lower odds. I hope it’s true (what the Fed says about lower inflation) but I’m also more skeptical that inflation is going to go away so easily”. The UNSTOPPABLE Markets Click the links below to continue reading about: - Arguments for the market rally to continue - The seasonal challenges of September - The durability of the Gold bull market - The Big View bullets - Keith’s weekly market analysis video [Click here to continue to the FREE analysis]([Click here to continue to the PREMIUM analysis]( Best wishes for your trading, Donn Goodman Every week we review the big picture of the market's technical condition as seen through the lens of our Big View data charts. The bullets provide a quick summary organized by conditions we see as being risk-on, risk-off, or neutral. The video analysis dives deeper. Risk On - Markets [continued to move](=) up with the S&P and DOW making new all-time highs while NASDAQ still being about 4.5% off its highs from early July. It will be pivotal to see the S&P hold above its 10-Day Moving Average around $559.75. (+) - [Volume patterns](=) are improving with the Russel 2000 showing zero distribution days over the last couple weeks. (+) - Only three of the [fourteen sectors]( we watch were down on the week and the most bullish intermarket relationship is showing consumer discretionary spending up 2.2% while consumer staples were down -1.3%, a strong risk-on indication. (+) - Energy, oil services, natural gas, and oil and gas exploration companies were the [biggest leaders]() on the week. Oil is in mean reversion from its recent oversold levels. Potentially indicating the economic numbers were better than expected, supporting higher oil prices and demand for energy. (+) - On a longer term basis, [Value]( continues to marginally lead over growth, but with both in a bull phase, we have a risk-on reading. (+) Click the links below to continue reading about: - Arguments for the market rally to continue - The seasonal challenges of September - The durability of the Gold bull market - The Big View bullets - Keith’s weekly market analysis video [Click here to continue to the FREE analysis and video.](=)[Click here to continue to the PREMIUM analysis and video](=). Best wishes for your trading, Keith Schneider CEO MarketGauge P.S. When you’re ready, here are 3 free ways we can help you reach your trading goals… - [Book a call with our Chief Strategy Consultant](), Rob Quinn. 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