Review the latest Weekly Headings by CIO Larry Adam.
Key Takeaways
- Labor market conditions are easing
- Soft start to September for the equity market
- Noticeably weaker low-income consumer
The start of football season – my favorite time of year! Week one started with a bang, with a matchup between my hometown team, the Baltimore Ravens, and the Kansas City Chiefs on September 5. While it was a hard-fought win for Kansas City, the reigning champs are on a quest for a three-peat – which is unprecedented in the League’s 104-year history! And just like football teams are bound to make adjustments throughout the season to improve their performance and adapt to new challenges, Fed officials must recalibrate their policy stance to ensure the economy stays on solid footing to achieve that elusive soft landing they have been aiming for after their quest to squash inflation. Here are five signs of weakness that emerged this week that suggests the Fed needs to get going in cutting interest rates:
- Labor markets easing | The once red-hot job market has cooled considerably. So much so that Powell mentioned the Fed “does not seek any further weakening” in the labor market during his Jackson Hole speech a few weeks ago. Since then, there have been a flurry of soft labor reports – starting with a sharp drop in job vacancies (lowest reading since Jan 2021), a weak ISM manufacturing report (with mentions that companies are reducing headcounts and initiating hiring freezes) and a Beige Book that painted a more downbeat outlook for the economy (with 7 out of the 12 Fed districts reporting flat to softer hiring conditions). In addition, the non-farm payroll report this morning showed that the economy only gained 142k new jobs, a tad softer than expected, with the unemployment rate modestly declining to 4.2%. With more data suggesting easing labor conditions, Powell knows that “the time has come to adjust policy” – and we expect the Fed to deliver a 25 bps rate cut on 9/18.
- Yield curve shifts ‘un-inverts’ | Market expectations for Fed rate cuts ramped up over the summer as softer economic data (particularly jobs related data) and cooling inflation suggest that it is time for the Fed to start dialing back some of its policy restraint. This has led to a sharp decline in yields across the curve, pushing the 2-year Treasury yield below the 10-year Treasury yield for the first time since July 2022 – ending the longest inversion streak (at least temporarily) on record at 790 days! This is noteworthy as historically, when the yield curve uninverts (i.e., moves from negatively sloped to positively sloped) it has signaled that a recession is near. Despite the yield curve’s strong track record, our forecast is that we avert a recession. Why? The Fed has plenty of firepower at its disposal to cut rates to support the economy through this soft patch to keep the expansion going.
