Displaying items by tag: fed
New US GDP data has been released and it is not good news. Though, it is isn’t exactly terrible either. US third quarter growth was 1.9%, the lowest level of 2019. The fall in pace was caused by a reduction in business investment. The pace of growth was 2.0% in the second quarter. The 1.9% rate actually exceeded estimates of 1.6% despite still being the weakest result of the year.
FINSUM: So the big question here is how the Fed will react to this news. They have generally had a glass-half-full approach, so this may keep them from proceeding with cuts, but we’d bet they undertake one more “insurance” cut.
Investors have been playing defense in stocks for months. Everyone has been very spooked by economic data and the trade war, which has caused a rotation into defensive sectors. However, a top manager at Fidelity, Denise Chisholm, is saying the opposite: it is time to play offense. Her core argument is that real interest rates in the US are negative--which happened after the Crisis and also in the 1970s and 1980s—which is highly bullish for the stock market. Further, the ECB and Fed are cutting at the same time, a quite rare occurrence, and one that has always led to an equity market rally.
FINSUM: This is an interesting contrarian argument. We particularly like the ECB + Fed narrative.
Quick quiz: what is the pillar of this bull market? Unless you answered “the US consumer”, you probably are not getting a passing grade. Therefore, any dents to the teflon-coated US consumer are very worrying, and that looks like the road we are headed down. New consumer spending data is in and it is poor. Spending at gas stations, on cars, and on home materials was considerably weaker. The overall boom in spending now appears to be over as we head into the winter, which could prove to be more than just meteorological.
FINSUM: There is good news and bad news. On the downside, this means that consumers may no longer be able to shoulder the load of carrying the economy. On the positive side, this could lead to rate cuts by the Fed, which the market would love, at least in the short-term.
It may seem overly bearish right now, but put this one in the “take note” category. A hedge fund manager on Bloomberg yesterday argued that the market looks set for a bear market downturn very similar to last year. According to the manager, a mix of liquidity constraints, insufficient Fed support, and large geopolitical issues, could all combine to drive prices down 20% or more in benchmark indices. The most interesting part of this argument is that he contends the pressures will create this downturn in the next few weeks.
FINSUM: Last year’s bear market was principally about investors worrying the Fed would hike the market into a recession. That is a completely different backdrop from right now. We don’t discount the chances for a downturn, but this logic does not seem sound to us.
It was uncertain for a while, and still is, but markets are increasingly expecting the Fed to cut rates again this month. Investors now put around a 75% chance that the Fed will slash rates by another 25 bp this month. The interesting thing is at the beginning of this week, the market’s odds were under 40%. However, the release of weak manufacturing data a few days ago sent expectations surging that the Fed would once again step in.
FINSUM: New jobs report data out today will only bolster the case for further rate cuts.