“You cannot escape the responsibility of tomorrow by evading it today.” -Abraham Lincoln
Back To School
As the kiddos go back to school, our fantasy football lineups are set, and the summer has come to an end, not only is the weather turning in the Northeast, but the inflation challenges seem to be cooling as well. The Federal Reserve’s (Fed) preferred inflation gauge, the PCE was released at the end of August and came in at 2.5% month-over-month for July. Chairman Powell’s recent comments emphasized the balancing of risking in weakening labor market conditions, but inflation risks have also diminished.
Powell finally sang the tune that investors were calling for, with the strongest signal yet that interest rate cuts are coming. "The time has come for policy to adjust,” (translation: “cuts"), Powell said at the Jackson Hole Economic Symposium, sparking a rally that moved stocks even more positive for the month after a disastrous beginning.
Bond investors also celebrated as the yield on the 10-year Treasury dropped (bond yields and prices move in opposite directions). It’s not a question of whether bond investors will benefit from rate cuts, it’s more of a mystery about when they will start and how quickly they will come down.
As Treasury yields have declined, so has the dollar exchange rate, leading to rallies in international equity markets denominated in the euro or yen. The weakness in the dollar should also create a short-term tailwind for the earnings of U.S. companies that derive revenues overseas, although the longer-term impact of a weak currency is more complex.
The 10-2 year Treasury spread, an oft-cited barometer of recession expectations, is approaching the narrowest spread in the last two years and is just about flat. This improving indicator from the Federal Reserve suggests a metaphorical applause by financial markets towards Chairman Powell’s most recent comments. A further move into a positive spread between these two key bond yields would create a more optimistic outlook among investors regarding global economic prospects.
