A slowing economy without tipping into a recession is the current definition of a soft landing. Are we on pace? As of now, I vote the answer is yes, however, far too early to conclude.
Inflation continues to modestly abate, as last week the Consumer Price Index (CPI) reported in line with expectations. Unemployment claims which are reported weekly have not spiked. The unemployment rate stands at 4.2%, up from 3.4% a year ago however still in a good range.
The Fed’s large decision this Wednesday will be to cut rates by either .25% or .50%. I’m thinking .25% based on Powell’s history as the Fed Chair. This is where it gets interesting as the futures market is betting the Fed will cut rates this year by a total of 1 to 1.25% and continue the pace through 2025. When the Fed meets this week, we will hear the “dot” plot which is a culmination of the projections of each Federal Reserve members best estimate of where interest rates will be a year from now.
In addition to the Fed rate decision this week, we will hear retail sales and various housing reports for August. On Wednesday, the report for mortgage applications should be interesting as mortgage rates are now sitting in the low 6% range, down from 8% last October. The shortage of new construction continues to be a headwind for prices to stabilize.
Markets move higher for the week
The major stock indexes moved higher for the week with the Dow rising 2.53%, the S&P 500 4.06%, the Nasdaq 5.83%, and the Russell 2000 4.03%. Foreign stocks rose 2.14% and emerging markets 2.47%.
Bond yields continue to move lower as the 10-year US Treasury finishing last Friday with a yield of 3.657%. This is down from where we started 2024 @ 3.87% and moved to a high in April of 4.7%
Where do we go from here?
The Bond market is pricing in a rapidly slowing economy. The stock market is pricing in a gradual slowing economy with corporate profits continuing to rise through 2025. Can both the bond and stock markets be correct at the same time? The awful answer is sometimes, however this time around it is hard to envision corporate profits rising as projected, if the Fed is forced to cut rates as much as anticipated. Keep in mind, projections are typically revised several times until the event.
In this market as most, your portfolio needs to be diverse and well allocated.
Interest on the US Debt
I tend to follow our US debt situation closely, however, was taken back by a report last week. This fiscal year ending October 30th, we are already at $1 trillion in interest payments. Currently the 2nd highest expense item of the Federal government year-to-date, behind Social Security and ahead of Defense and everything else. This cost is on pace to continue to rise as we need to borrow additional funds annually just to pay our bills.
How may this impact the future of the stock and bond markets?
Some well-known economists believe our debt does not matter and many believe the day of reckoning is down the road. Whatever side you fall, the fact is the rising interest payment will need to be paid from someone’s wallet. The question is when, who’s wallet, how much and of course the impact.
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