Economic and Market Overview
September 2024
The Federal Reserve kicked off its rate-cutting cycle in earnest, helping Treasuries, equities and credit to another solid month.
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Treasuries extended their monthly winning streak to five and the yield curve bull steepened again as the FOMC announced that its first rate cut since 2020 would be a half percent move (see below). The S&P 500 was also positive for the fifth consecutive month, returning 2.1%, while its equally-weighted version bested that with a 2.3% gain. In credit, investment grade supply set a record for September as J.P. Morgan reported $171 billion in total IG issuance for the month, approximately 35% more than the average of recent Septembers. This deluge began right out of the gate and initially pressured spreads wider, but the indigestion was not to last as spreads finished the month tighter. WTI futures declined for the third straight month, finishing 7.3% lower over a volatile month in which investors assessed the implications of Chinese economic weakness and stimulus measures, and the escalation of the conflict in the Middle East. The U.S. Dollar Index dropped 0.9% as the currency weakened against five of the six constituents.
Economic Data
Nonfarm payrolls rose at a 142,000 pace in August, 23,000 under expectations, and included an 88,000 net downward revision to the prior two months. The unemployment rate, however, reversed course from a four-month trend, falling by 0.1% to 4.2%. Economists expect a 150,000 increase in payrolls and no change to the unemployment rate in the September data release on October 4. Consumer spending persisted in August as retail sales grew at a 0.1% clip and July’s results were revised slightly higher. This surprised forecasters as they had expected a modest decline. As for sentiment, the Conference Board and University of Michigan’s indices contradicted each other as the former came up well short, while the latter hit a five-month high. In the manufacturing sector, hard data were generally stronger than expected, though S&P Global’s US Manufacturing PMI fell further into contraction territory. Housing data were mixed as new home sales and housing starts beat while existing and pending home sales missed. U.S. real GDP grew at a 3.0% annualized rate in Q2 according to the third release, a 0.1% surprise to the upside even as personal consumption was revised 0.1% lower to 2.8%. Q3 GDP estimates are currently around 3.0%. The annual revisions to GDP also saw significant upgrades to the data from 2021 and 2022. Income figures were revised substantially higher, which closed the gap between GDP and GDI, increased the savings rate all the way into 2024, and reduced a downside risk to consumer spending.
Inflation
Inflation data for August once again convinced most market participants that the longer-term disinflationary trend remained intact. In line with surveys, headline CPI rose by 0.19% MoM. Core was actually a little hot as the 0.28% rate exceeded consensus by 0.08%. The surprise was attributed to owners’ equivalent rent, however, and did little to dissuade markets from believing that the cutting cycle would begin on September 18. Core PCE came in at 0.13% MoM, a touch cooler than expected, bringing the YoY figure to 2.7%.
Monetary Policy
The Fed inaugurated the fourth easing cycle of the new millennium with a larger-than-expected 50 bp cut, following an unusually-active pre-meeting blackout period that resulted in a rare degree of uncertainty about the policy decision. In the end, it appears that Chairman Powell led a divided Committee to deliver the more dovish outcome. While Powell insisted that the Fed has not fallen behind the curve, he said the jumbo cut indicated their commitment to avoid doing so. Governor Bowman delivered the first hawkish dissent by a Board Governor since 1994, but even she would have acquiesced to a smaller cut. The dot plot indicated a median FOMC projection of 50 bps of cuts in the final two meetings of 2024 and 100 bps of cuts in 2025. Interest rate markets continued to price a more dovish path of policy by about one cut this year and two cuts next year.
Sources: Bloomberg Index Services Ltd., Bloomberg.
This overview is for informational purposes only. The information has been obtained from sources considered to be reliable, but the accuracy and completeness are not guaranteed. There is no assurance that any economic trends mentioned will continue or that any forecasts will occur. Economic data are as of the dates noted.
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