- The Fed held rates steady in a range of 5.25% to 5.50%, as expected. The FOMC statement noted “Recent indicators suggest that economic activity has been expanding at a solid pace” and “The Committee remains highly attentive to inflation risks.”
- However, the real fireworks were in the updated Summary of Economic Projections. The Fed upgraded its forecast for real GDP in both 2023 and 2024, while also lowering its estimate for core PCE (inflation) for 2023. Most importantly, the Fed revised its outlook for the Fed Funds rates in 2024 and 2025. It is now forecasting the Fed Funds rate will end 2024 at 5.1%, compared to a forecast of 4.6% in June. As well, the forecast for 2025 Fed funds rate rose to 3.9% (from 3.4%) and the 2026 rate is estimated at 2.9%. This is “higher for longer” message that markets are now starting to accept.
- Fed Chair Powell emphasized that the Fed’s goal is to achieve a soft landing. Still, markets reacted negatively to the Fed’s new forecast with both bonds and equities selling off. The 10Y Treasury approached 4.5%.
- In other macro news, initial jobless claims came in better than expected, at 201,000 compared to the estimate for 220,000. Existing home sales were lower than expected at 4.04 million annual rate (est. 4.10 million, prior 4.07 million). Across the pond, the Bank of England held rates steady at 5.25%, which was a surprise compared to market expectations for a +25 bps hike to 5.50%.
- Equities: All Major indexes moved lower amid a strong equity sell off driven by the Federal Reserve’s “Hawkish Pause” decision and higher rates for longer emphasis. Earning reports were few and calm, with tame beats by AutoZone (AZO) and FedEx (FDX) and relatively in-line reporting by General Mills (GIS) and Darden Restaurants (DRI). In Corporate News, Disney (DIS) announced plans to double its planned investment in its theme park division from US$ 30bi to US$ 60bi over the next 10 Years without providing much context in the yearly breakdown or specific reason for the increase, Amazon (AMZN) hosted its annual devices event with the final keynote highlight focusing on the new improved and AI enhanced Alexa Assistant while also announcing plans to hire 250k workers for the upcoming holiday season showing optimistic expectations for demand given the company hired 150k last year, Cisco (CSCO) acquired cybersecurity service provider company Splunk (SPLK) for US$ 28Bi marking its largest acquisition to date, Broadcom (AVGO) shares sold off amid reports that Alphabet (GOOGL) is considering dropping the company as a supplier for Google Division chips as early as 2027, Philip Morris (PM) was reported to be interested in selling a stake in its Pharma Division and Founder of News Corp (NWS) and Fox Corp (FOXA) Rupert Murdoch announced he is stepping down from both companies board in November. In strikes, UAW increased the magnitude of its auto plant strikes as the Unions demands and Car manufactures offer remain far apart and CNBC reported the Writers Guild of America strike that has stopped Hollywood for over 100 days is close to reaching a deal with entertainment providers. In IPOs, both InstaCart (CART) and Klaviyo (KVYO) saw their shares close higher by over 20% during 1st day of trading only to fizzle by closing below their IPO prices by the end of the week.
The Week Ahead
- A somewhat light week for macro data in the week ahead. We will get August PCE figures, which is the Fed’s preferred inflation metric. August MoM PCE is estimated at 0.4% while core MoM is estimated at 0.2%. On a YoY basis, headline PCE is estimated at 3.5%, while core is estimated at 3.9%.
- Equities: Nike (NKE), Costco (COST), Micron (MU), Paychex (PAYX), CarMax (KMX) and Carnival Cruises (CCL) are all set to report.
Market Summary – Returns and Yields
- Equities had another down week, but remain up for the year-to-date. Fixed income has been mixed.
Definitions, sources, and disclaimers
- Gross Domestic Product (GDP): A comprehensive measure of U.S. economic activity. GDP is the value of the goods and services produced in the United States. The growth rate of GDP is the most popular indicator of the nation’s overall economic health. Source: Bureau of Economic Analysis (BEA).
- GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, it does not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. It does not anticipate their impact on forthcoming economic reports beyond the standard internal dynamics of the model.
- The Current Employment Statistics (CES) program produces detailed industry estimates of nonfarm employment, hours, and earnings of workers on payrolls. CES National Estimates produces data for the nation, and CES State and Metro Area produces estimates for all 50 States, the District of Columbia, Puerto Rico, the Virgin Islands, and about 450 metropolitan areas and divisions. Each month, CES surveys approximately 142,000 businesses and government agencies, representing approximately 689,000 individual worksites. Source: Bureau of Labor Statistics (BLS).
- Initial Claims: An initial claim is a claim filed by an unemployed individual after a separation from an employer. The claimant requests a determination of basic eligibility for the UI program. When an initial claim is filed with a state, certain programmatic activities take place and these result in activity counts including the count of initial claims. The count of U.S. initial claims for unemployment insurance is a leading economic indicator because it is an indication of emerging labor market conditions in the country. However, these are weekly administrative data which are difficult to seasonally adjust, making the series subject to some volatility. Source: US Department of Labor (DOL).
- The Consumer Price Index (CPI): Is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available. Source: Bureau of Labor Statistics (BLS).
- The national unemployment rate: Perhaps the most widely known labor market indicator, this statistic reflects the number of unemployed people as a percentage of the labor force. Source: Bureau of Labor Statistics (BLS).
- The number of people in the labor force. This measure is the sum of the employed and the unemployed. In other words, the labor force level is the number of people who are either working or actively seeking work.Source: Bureau of Labor Statistics (BLS).
- Advance Monthly Sales for Retail and Food Services: Estimated monthly sales for retail and food services, adjusted and unadjusted for seasonal variations. Source: United States Census Bureau.
- Federal Open Market Committee (FOMC): Responsible for implementing Open market Operations (OMOs)–the purchase and sale of securities in the open market by a central bank—which are a key tool used by the US Federal Reserve in the implementation of monetary policy. Source: Federal Reserve.
- The Federal Funds Rate: Is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. Source: Federal Reserve Bank of St. Louis.
- The “core” PCE price index: Is defined as personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends. Source: Bureau of Economic Analysis (BEA).
Sources: U.S. Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), U.S. Department of Labor (DOL), Federal Reserve, Federal Reserve Economic Database (FRED), Federal Reserve Bank of Atlanta, U.S. Census Bureau, Department of Housing and Human Development (HUD), U.S. Department of Agriculture, U.S. Energy Information Administration (EIA), U..S Department of the Treasury, Office of the United States Trade Representative (USTR), U.S. Department of Commerce, data.gov, investor.gov, usa.gov, congress.gov, whitehouse.gov, U.S. Securities and Exchange Commission (SEC), Morningstar, The International Monetary Funds (IMF), The World Bank (WB), European Central bank (ECB), Bank of Japan (BOJ), European Parliament, Eurostats, Organization for Economic Co-operation and Development (OECD), National Bureau of Statistics of the People’s Republic of China, Organization of the Petroleum Exporting Countries (OPEC), World health organization (WHO).
Financial Markets – Recent Prices and Yields, and Weekly, Monthly, and YTD (Table): Bloomberg, Weekly Market Data is in USD and refers to the following indices: Macro & Market Indicators: Volatility (VIX); Oil (WTI); Dollar Index (DXA); Inflation (CPI YoY); Fixed Income: All U.S. Bonds (Bloomberg Aggregate Index); Investment Grade Corporates (Bloomberg US Corporate Index); US High Yield (Bloomberg High Yield Index), Treasuries (ICE BofA Treasury Indices); Equities: U.S. Industrials (Dow Jones Industrial Average); U.S. Large Caps (S&P 500); U.S Tech Equities (Nasdaq Composite); European (MSCI Euope), Asia Pacific (MSCI AP), and Latin America Equities (MSCI LA); Sectors (S&P 500 GICS Sectors) Source: Bloomberg. Fed Funds Rate probabilities, Source: CME FedWatch Tool.
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