Monday Takeaways: Getting by With a Little Help From the Fed

Shah Gilani|September 23, 2024

“I get by with a little help from my friends…“

The banks were likely singing that 1967 Beatles tune after the Fed’s 50-basis point cut last week.

After all, refinancing all our debt just got cheaper.

But here’s the thing for the rest of us…

That rate cut is going to take a bit to work its way through the economy.

Plus… the Fed is now paying attention to the second part of its mandate. Unemployment.

Could the rate cut be too little, too late?

See how it all adds up in your Monday Takeaways.

Click on the thumbnail below to watch.

Transcript

Hey, everybody. Shah Gilani here with your Monday Takeaways.

The first takeaway everyone is looking for is what to take away from last week. Well, we know the Fed cut 50 basis points. Surprise. It was to me.

I was expecting 25. Admittedly, most economists and analysts were expecting 25. Didn’t work out that way. Got 50.

Take away from there was risk on, baby.

Thursday, we saw markets shoot higher. Now they didn’t necessarily follow that up on Friday, but Thursday was a great day. So what happened Thursday? S&P 500, new all time highs. Dow Jones Industrials, all time highs.

Russell 2000, almost new highs.

Nasdaq Composite, not so much. Nasdaq 100, not so much.

Takeaways, markets loved it, but not overly exuberant to the point of follow through on Friday. Futures up huge on Monday today. No. It’s a little bit of, oh, okay. So is it buy the rumor, sell the news? Not so sure.

Two other takeaways from the Fed’s rate cut, and it’s a yin and yang thing. So there’s the positive side, which is the Fed sees a soft landing. It sees the labor market being just alright, but just wants to get ahead of the fact that maybe if it’s slowing down, if there’s gonna be some problems down the road, the economy’s gonna slow a little bit. They wanna get ahead of that. But they talked about it in terms of we are recalibrating.

Yes. Recalibrating our monetary policy goals to emphasize the equality of their dual mandate. Stable prices, full employment.

So, really, they’ve been saying it. They’re gonna keep a closer eye on the labor markets, on employment, on what’s happening in the labor markets, what’s going on in the economy as far as workers.

That includes wages. That includes a lot of things. What they’re saying is we think we pretty much got this inflation thing under control. So we’re gonna keep an eye on labor market. You’re gonna keep an eye on labor markets because that’s the real takeaway. That’s the positive that, hey. I think we’re gonna do just fine here, and there’s a negative to the 50 basis points cut.

What if they see well, maybe things are starting to slip a little bit more because they’re not gonna say that because that’s not what they said. They said things are just fine. Thank you. But, you know, we are actually higher than we need to be, and we wanna start to bring rates down to normalize them.

Their term, not mine. They didn’t say normalize, but that’s what they really mean when they wanna bring rates down. They need to bring rates down for their largest constituent, which are the big banks and the government. Because if it bring rates down, the cost of refinancing the deficit, the debt is cheaper.

So the negative takeaway, though, on a 50 basis points cut is it’s gonna take some time for that to work through the economy. Months. Even if there’s another cut or two coming, it’s still gonna take a little bit of time. And if it takes bit of time, couple of quarters, and the economy starts to slow down and we start to see unemployment rise, then maybe they’re gonna be too late to stave off a recession, whether it’s a mild one or whatever it’s going to be. So that’s why the markets are a little bit jittery.

It’s like, well, is it good or isn’t it good? Twenty five basis points, I think, would have been so much better. We would have had a nice rally. Well, we would have had some volatility, but then probably get past all that knowing the Fed’s gonna continue to cut.

Now we don’t know if the Fed’s gonna cut anymore. Fed funds futures say they are going to cut at least 50 basis points more by the end of the year. Markets, if they see that, will probably like it, the less they’re scared that the Fed’s cutting because the recession is coming. Yeah.

Confusing. Hey. With the here’s the takeaway, people.

It is confusing because the Fed does not adequately guide forward. They don’t actually they’re they’re all over the place. We have so many Fed speakers this week. It’s going to muddle the waters even more.

Muddy the waters, I should say. Muddle will be nice because that’d be a nice cocktail we’re making. But now we’re just talking about Mississippi mud here with everybody saying everything different. So good luck with that.

Now we got some numbers coming up this week. So nothing much today on Monday, but Tuesday, we got home prices and we got KB Homes earnings. So that’s gonna be interesting because home prices and as far as living expenses, home prices, as far as how they fit into PCE, which is coming on Friday, are gonna be important. So keep an eye on Tuesday on home sales and on KB Home earnings.

Wednesday, we’ve got Micron earnings. Everyone’s gonna be watching that. So takeaway there is it’s not so much as Micron goes as so go the semiconductors. That’d be more Nvidia’s job. But micron people are gonna be watching.

Thursday, we got the jobless claims. Everyone’s gonna be watching that. Jobless claims people. Labor market.

Uh-huh. What is the Fed watching? They’re gonna be watching that, so you better be watching it too. Friday, of course, we’ve got consumer sentiment, which is gonna be less important, I think, than the PCE numbers.

So PCE, personal consumption index, the Fed’s favored measure of inflation comes out on Friday. Now the estimate for August is, get up 2.3% on a year over year basis. So that’s pretty good because that is two tenths that would be two tenths lower than what PCE headline was in July. So looking for an estimate of 2.3% versus July 2.5%, not so bad.

However, core, which excludes food and energy, expected to be up 2.7% versus July’s 2.6%. Now that’s where the home expenditures come in, rent, ownership, etcetera.

That’s been sticky. And if we see on Tuesday that home prices are up or we see the KB is doing well and we realize there’s a strong market still, then that means that home prices and everything contingent around rent, etcetera, is going to be sticky.

Also, we want to look through on PC to see what service is doing because services have been sticky also as far as inflation. So core, 2.7% is expected.

That’s 0.1% above July. If it’s much higher than that, if it, heaven forbid, hits a three, market’s gonna convulse because, well, maybe the Fed’s not gonna cut anymore this year. Takeaways, it’s rough out there. Yes. The stock market making new highs makes it look easy.

If you’re gonna lean one way, here’s my takeaway. Lean into the positive. Lean into the fact that earnings look really good. The expectation for the next 24, I’m gonna go just 12 months out, is about just shy of 20% earnings growth. K? So, yes, we’re a little rich at about 21.34 times forward earnings on a PE basis, but that’s okay because if the earnings come in higher, then that multiple is worth it.

So I’m leaning into the positive. Doesn’t mean you don’t have your stops in place. Doesn’t mean you don’t have to be careful out there because you do. Catch you guys next week. Cheers.