It’s All About the Fed

Quincy Krosby:

Hello from LPL Financial. Welcome to the Talking Point. I'm your host, Quincy Krosby. Good morning everyone. This is Quincy Krosby. It is Monday morning, September 16, and it is the Talking Point. Thank you for joining me. The market right now is trying to decipher whether or not the Fed goes to 50 basis points or 25 basis points on September 18. That's Wednesday afternoon. The fed funds futures market that you hear about all of the time is actually suggesting that now it's going to be 50 basis points. Now we've seen it go back and forth and back and forth, but as we enter this week, it's looking as if that market, fed funds futures market, sees a 50 basis point rate cut. But, in addition to that, the weakness in the U.S. dollar versus the dollars global peers also suggest that the dollar sees 50 basis points. Right?

Quincy Krosby:

In addition to that, take a look at the two-year Treasury yield. Now, keep in mind the two-year Treasury yield is in line with monetary policy. It's how it sees the Fed moving, and now that suggests the two-year Treasury will suggests 50 basis points. In addition to even that, when we look out at the equity market, you know, the home builders have actually had an underpinning of the suggestion that rates are going to come down. But we knew the rates are coming down. The Fed told us they're going to cut rates, so with 25 basis points or 50? But let's be clear, 50 basis points makes a bigger difference for the home builders, does it not? In addition to this, take a look at gold. Gold has been inching higher and higher. The key here is what is gold looking at?

Quincy Krosby:

Well, gold looks for rate cuts here in the U.S. because the dollar then weakens, it actually helps underpin the gold prices, right? Gold prices come down and then the belief is there's more buying in gold, and keep that in mind as well. So, all told all together, right now the market is looking at 50 basis points on Wednesday. Now, the Fed hasn't told us they're going to do this. They didn't telegraph it. So what really matters is the characterization of a 50 point cut, because what the market does not want, it doesn't want an emergency cut that, oh my goodness, the economy is slowing so dramatically. The labor market, we're worried about that. It's deteriorating. That's not what the market wants. The market wants, if it had its druthers, so to speak, a 50 basis point rate cut that is based on the Fed's belief that inflation is coming down at an acceptable pace.

Quincy Krosby:

And this is, despite that we did see a smidgen of rates of inflation a bit higher from the Consumer Price Index, and that came from the rental component. What do I rent my condo out for? What do I rent my house out for? As opposed to what I can sell it for? That's about 30% of the CPI, the owner's equivalency rent. So overall, that's what the market wants, and that's by the way, what the market thinks is the rationale for a 50 basis point cut. So we are going to see, because we're going to have tomorrow, on Tuesday, we're going to have retail sales, which are extremely important. And we are also going to have industrial production. Today, Monday, we had a report coming from the Empire Fed Survey, which is the manufacturing report for the New York State, greater New York State area, and it has been in the doldrums for so many months.

Quincy Krosby:

Now, the fact is that the Empire State, which would be New York State, Connecticut, and part of New Jersey is not reflective of the broader manufacturing United States. We look to the Philadelphia Fed Survey, which will come out. That will be the next one. That one is more in line with the American, you know, manufacturing states. But the fact is that unbelievably, the Empire Fed Survey actually in a bit higher, including, including employment expectations and new orders. Still not great, but less bad. And, you know, in the market, when we talk about less bad, less bad really does matter because it shows a bottoming. If you have enough less bad data releases, it shows that we are bottoming. So my point here is whether or not we see tomorrow with retail sales, we see tomorrow with in industrial production, does it shift yet again, back to 25 basis points?

Quincy Krosby:

The Fed is not a hedge fund and they will come out and say that every so often. They're not moving back and forth and back and forth. It's made up of PhD economists and they tend to have a longer view, a longer range of what they're looking at. However, however, as everyone knows, the Fed made up of, you know, economists also has the, on this hand, this goes this way. On that hand, it goes that way. Kind of difficult for them to make up their minds. Still, we have to remember that the minutes from the July 31 Fed meeting indicated there were several members, several members who observed that perhaps it was a good idea to cut rates right then at that meeting. We have to keep that in mind. Their view was most likely that they were worried about the labor market, that they were worried about the indications that the labor market was slowing at a faster clip.

Quincy Krosby:

In any case, we will look to see how the Fed funds futures market and the dollar and gold and the two-year Treasury yield look at and view and assess the data coming out. Today also, I do want to point out, as September 16, well keep in mind that statistically, historically, the historical pattern, regarding September as a difficult month actually begins September 16, because it begins the second half of September. And according to the seasonality underpinning September as a difficult month, the negative seasonality actually begins on September 16. So the question for the market has been, wait a minute. We just had an awful, awful beginning of September. Do we have to go through more bouts of volatility now? Most likely yes, because again, the Fed is going to surprise the market. If you're in the camp of 25 basis points, you may be surprised with 50. If you're now in the 50 basis points camp, you may be surprised that it comes out with 25 basis points.

Quincy Krosby:

So there may be a sell on the actual, you know, announcement from the Fed. And much, as I said, going to depend on the press conference, not to mention the so-called dot plot, where the members will suggest where they see rates going. Are we going to see a series of rate cuts this year as the market believes is going to happen and a series of rate cuts next year? So a lot for the market to have to decipher. Right now also in today's market, I want to be specific, we're looking at Apple and Apple share's pre-market have been coming down. Based on some data suggesting that sales for the new iPhone Pro series that the Apple introduced at its latest unveiling of their new products, that that is not going well. And so the market has been trimming Apple broadly. We'll see if it continues, you know, as the market opens.

Quincy Krosby:

I'm going to keep my eye on that. But you know, the market is very based on, okay, how many of these are you going to sell? What are we going to wind up seeing? So this information that has come in regarding the potential for weaker sales, weaker orders for those devices has been weaker than expected, weaker than anticipated. In any case, this is a very busy week for the market. It is about the Fed because again, this changes the Fed's monetary policy, whether it's 25 basis points or 50. And the question again for the market is will it be 50? An asterisk here as we say goodbye on this call, keep in mind too that what we're seeing, and this is very important for the Fed, is that it is not just the lowest wage earners now that are slow in their credit card payments, even moving towards delinquencies, slow in the payments for their cars where they took out loans.

Quincy Krosby:

It's now moving up a bit in that wage scale, and that's something that the Fed is going to be very much focused on. And as well, small business owners. Small business owners, the backbone of our economy, as I see it, creating 55% of net new job openings. They are under pressure because they go to the bank. They don't have access to the capital markets the way the big corporations do when they want to borrow money from the market. So they are under pressure with the higher rate regime as well. So that could also be, not again, an emergency that the Fed sees, but understanding that the higher rate regime, even with 25 basis point cut, is still going to put pressure on lower wage earners and small businesses. So a lot for the market to digest. And by the time we get to the Fed meeting at two o'clock, we'll get the statement before then, but on September 18, I suspect that the Fed funds futures market is going to sway a little bit more, but that's something that we can expect. But nonetheless, the Fed is going to be cutting rates finally on September 18. Thank you so much. Have a good week.

Quincy Krosby:

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Quincy Krosby:

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