In July, rising unemployment and a cooling labor market, coupled with lower trending treasury yields and indications from the Federal Reserve of possible rate cuts in their upcoming September meeting led to overall positive performance across asset classes, with the exception of alternative assets.
“’A reduction in our policy rate could be on the table as soon as the next meeting in September,’ ‘We’re getting closer to the point at which it will be appropriate to reduce our policy rate, but we’re not quite at that point yet,’ – Powell”
In July, the Personal Consumption Expenditures (PCE) report demonstrated stability in inflation metrics, following last month’s trend. Both Headline PCE and Core PCE remained relatively stable in year-over-year price growth, with Headline PCE dropping from 2.60% to 2.51% and Core PCE increasing only slightly from 2.62% to 2.63%. Similar to last month, the month-over-month changes in Core PCE shows even further encouraging data, coming in at only 0.18%. While the monthly trend for the past few months is on a positive trajectory, month-to-month data can be volatile. Therefore, the three-month annualized figure may provide a better picture of the current trend. The three- month Core PCE inflation rate came in at an annualized rate of 2.31%, just slightly above the Fed’s 2.00% target rate.
The FOMC meeting on July 31st resulted in the Federal Reserve keeping its Federal Funds rate unchanged. During the meeting, Jerome Powell stated, “A reduction in our policy rate could be on the table as soon as the next meeting in September… We’re getting closer to the point at which it will be appropriate to reduce our policy rate, but we’re not quite at that point yet” [1]. Many commentators believe the Federal Reserve had sufficient data to support cutting rates at this month’s meeting, as the recent trends in the labor market and inflation data have been positive enough to justify decreasing rates.
Following their meeting on Wednesday, a slew of weak economic data was released; first with ISM manufacturing PMI which dropped to an 8-month low of 46.8 down from the previous month of 48.5. Secondly, labor data released on Friday came in unexpectedly cool. The unemployment rate rose to 4.3% from the prior 4.1%, and nonfarm payrolls increased by only 114,000 in July, well below the forecasted 175,000 [2]. With the Fed not cutting rates, followed by relatively weak labor data, the market (S&P 500) sold off over 2% last Friday as fears of a recession increased. However, the Federal Funds futures market is now pricing in a high probability of a 50bps rate cut at the next FOMC meeting on September 18th as the Fed responds to this worse-than-expected labor data. Moving forward, the Fed will likely be challenged in balancing risks, with potentially a higher risk of failing to achieve a soft landing than the risk of letting inflation rates become unanchored.
As July concluded, equity and bond markets both posted solid gains as investors assessed the increased probability of a soft landing and the higher likelihood of the Fed beginning to taper their Federal Funds rate in the near future.. Notably, a particular shift in trend emerged in July: large tech names and mega-cap stocks, which have propelled the market all year, largely underperformed their value and small-cap counterparts. The S&P 500 Value index posted returns of 4.58% compared to -1.33% for the S&P
500 Growth index. This is the largest monthly outperformance of value stocks relative to growth stocks in over two years. A similar change in trend can be seen when comparing large-cap stocks to small-cap stocks, with the S&P 600 returning 10.80% for the month compared to the S&P 500’s 1.22% return. Much of this trend is likely fueled by investor concerns that big tech artificial intelligence names may not achieve the large growth expectations that have been priced in amidst the AI hype, and valuations of value and small cap names appear cheap relative to large cap growth counterparts and have become increasingly more attractive to investors.
- https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm
- https://www.reuters.com/markets/us/us-job-growth-misses-expectations-july-unemployment-rate-rises-43-2024-08-02/
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Your Smarter Way Portfolio Management Team
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