Along with over 90% of the economists surveyed, I incorrectly expected the Fed to take a more conservative path to begin their rate cutting cycle last week with only a 25 basis point cut to its target rate. So, at least I was in good company with my expectations. My supposition was based on the thought that the historically conservative Fed would not want to alarm the market on its first cut in the cycle and would remain consistent with their messaging over the past several weeks. Powell and Co. instead cut 50 bps with commentary during the presser that the Fed will remain flexible. This move does not signify a faster pace of future cuts, nor are they in a rush to introduce more restrictive policies. Furthermore, he indicated this move was a “recalibration” of their policy stance with an eye toward maintaining strength in the labor market while allowing inflation to continue to move lower.
In addition to the above forward guidance, the Fed’s new dot-plot (shown above) indicates the expectation for an additional 50 basis points of rate cuts at the last two Fed meetings of the year (25 basis points in both November and December). The dots also suggest an additional 100 basis points of further reductions throughout 2025. If we’ve learned nothing from our attention to the Fed and its intentions throughout the year, we should at least acknowledge that as projections extend further out into the future, the expectation for precision diminishes significantly. I liken it to the confidence one would place in the local weather forecaster. I have reasonable faith that the forecast for tomorrow will likely be on point. However, a 10-day forecast should be taken with a grain of salt. The same can be said for understanding the Fed’s guidance. Just prior to a Fed meeting, I have a stronger conviction regarding the direction (if not the size) of a Fed move. Still, those forecasts several months in the future can drastically differ from the ultimate decision.
This week should offer market participants additional perspective on the Fed’s policy as the calendar has a number of opportunities for Fed officials to give commentary on the latest move. My attention will be focused on any concerns, or lack thereof, regarding the employment situation. Though Nonfarm payrolls showed an uptick this past month, initial jobless claims dropped. Chair Powell acknowledged the slight increase in unemployment but indicated it has not yet increased to a level warranting concern. That being said, the 50 basis point cut could have been a pre-emptive move, considering that data continues to suggest some challenges for the economy may be lingering under the surface. Notably, the growth challenges highlighted in the Beige Book should not be ignored.
SWBC client activity in municipal bonds followed the lead of the new issue market, with lighter activity during the week leading up to the Fed’s decision. Furthermore, buying patterns continue to focus on 5% coupons towards the longer end of a given portfolio’s constraint with more call protection or very short-dated paper with continued attractive yield given the still inverted curve inside of 2 years. A common statement we have received from portfolio managers and traders suggested they are hoping to be able to add bonds this week, with the more robust $14.4 million calendar reigniting the strong supply side of the market. I continue to reiterate that supply should be expected to fall off as we move closer to the election. This brief respite in issuance should be short-lived but adds another wrinkle into the opportunity for investors to continue putting capital to work. The question to ask is, when will the music stop? Demand remains strong with continued money flowing into funds. The challenge for buyers will be to continue at a steady pace of buying and adding to portfolios without paying up but not getting ahead of themselves in terms of getting invested. Should rates continue to drift higher further out the curve, I continue to see an opportunity to lock in higher long-term yields at attractive ratios.
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The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index represents the portion of the Bloomberg Barclays Global Aggregate Index that measures the aggregate value of global debt with a negative yield. • The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. • The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.• The Cboe Volatility Index® (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of weekly S&P 500® Index (SPX) call and put options with a range of 23 to 37 days to expiration.• The ICE BofA MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of implied volatilities on the CT2 (Current 2 Year Government Note), CT5 (Current 5 Year Government Note), CT10 (Current 10 Year Government Note), and CT30 (Current 30 Year Government Note), with weights 0.2/0.2/0.4/0.2 respectively.• The Markit CDX North America Investment Grade Index is composed of 125 equally weighted credit default swaps on investment grade entities, distributed among 6 sub-indices: High Volatility, Consumer, Energy, Financial, Industrial, and Technology, Media & Tele-communications. Markit CDX indices roll every 6 months in March & September. • The Markit CDX North America High Yield Index is composed of 100 non-investment grade entities, distributed among 2 sub-indices: B, BB. All entities are domiciled in North America. Markit CDX indices roll every 6 months in March & September. • The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. Intercontinental Exchange (ICE) US computes this by using the rates supplied by some 500 banks.
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