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Two Reasons the Fed Could Cut Rates
The latest set of economic numbers support a ‘goldilocks’ scenario for stocks. For example, durable goods orders continue to fall (a positive for inflation); and employment remains robust (a positive for growth). The question is what could cause the Fed to cut rates mid next year (given this is what is priced in)? I will offer two reasons… both of which I think are unlikely before June.
Why I’m Not Betting on a Soft Landing
With the Fed seemingly on pause and bond yields sharply off their highs – markets are optimistic. Equities have surged the past few weeks – up around 17.6% year-to-date. The S&P 500 added 10% in just 3 weeks! The narrative (as far as I can tell) is we’re headed for “soft landing”. But can we be so sure? Past experience suggests a “hard landing” is the more likely outcome. And absent other evidence, when the Fed hikes this much (and especially this fast) – we should expect one.
Inflation Trending Lower… But More to Do
Today we received CPI for October. It was slightly softer than expected and continues to (slowly) trend lower. That’s good news. However, stocks jumped on the data and feel its enough for the Fed to end further hikes. What’s more – the market is now pricing in rate cuts as early as March. That feels like a dangerous (aggressive) assumption… I think there’s a lot more work to do. Remember – getting inflation down from 4% to 2% is where the hard work begins. Wage growth for example remains at 4.2% YoY.
Fed Warns, Stocks Shrug
“We still have a long way to go” – that was the not-so subtle warning from Jay Powell this week. After what many felt was a slightly less hawkish Fed Chair last week – sparking an equity rally – Powell attempted to adjust his tone at an IMF event. Was he successful? That’s hard to say – as equities seemed to shrug off any warning from the Fed – surging ahead to be up 15% year-to-date. Here’s my question: are investors being too sanguine about what’s still unknown?