The U.S. Federal Reserve cut the short-term Federal Funds rate by .50% in September, lowering the rate that banks use for borrowing overnight money down to 4.75-5.00%. Although widely expected, risk assets rallied following the move, with further interest rate cuts priced in over the coming year. Giving the Fed air cover for rate cuts is steadily rising unemployment, softening inflation, and weakening GDP growth. Despite that backdrop, there are few calls for a so-called “hard-landing” for the U.S. economy, which remains fairly robust by most measures.
Nonfarm payrolls rose by 142k in August, below expectations for a gain of 165k, while July’s gain were revised down from 114k to 89k. The Unemployment Rate dropped from 4.3% to 4.2%, while the Underemployment Rate rose from 7.8% to 7.9%. Labor Force Participation held steady at 62.7%, while Average Hourly Earnings rose higher than expected in August, up +0.4% MoM, and have climbed +3.8% YoY. The JOLTS Job Openings number fell from 7,910k to 7,673k, suggesting a further softening in the demand for labor.
Consumer price inflation data came in about as expected in September, with the August CPI report showing a +0.2% MoM rise in prices, and ex-food & gas, a +0.3% gain. Year over year, CPI is up just +2.5%, while core CPI has risen by +3.2%. At the wholesale level, PPI was up +0.2% MoM and 1.7% YoY, while core PPI rose +0.3% MoM and +2.4% YoY. The Core PCE Price Index ticked up by +0.1% in August, and has risen +2.7% YoY.
The 3rd reading for Q2 GDP showed a U.S. economy growing at a 3% rate, although recently released ISM figures for September suggest an economic contraction may be coming. The S&P Global US Manufacturing PMI came in at 47.3, while the ISM Manufacturing PMI number was 47.2. The ISM Prices Paid reading came in below expectations (48.3 versus estimates for 53.5), while the ISM New Orders index beat expectations at 46.1 (versus 45.0).
All in all, the Fed felt the time was right to begin cutting interest rates. Whether the U.S. economy falls into recession, hard or soft, is anyone’s guess. There remains ample fiscal stimulus to potentially offset a decline in the private domain. Market volatility should spike around election time, although we’ll remain focused on corporate earnings. EPS expectations are high, as are equity markets. It will be important for S&P 500 companies to meet expectations in order to keep this great bull market moving in the right direction.
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