After Painting Itself Into a Corner, the Fed Will Have to Cut Rates Again
The past few trading sessions have been interesting from an economic point of view. Last week, the initial read of Q3 GDP came in under expectations as the U.S. economy grew by 2.7%, down from 3% in Q2 and a tad lower than economist consensus.
In addition, on Friday we saw a horrid print of just 12,000 jobs created in October according to the BLS. To be fair, job growth was impacted by two major hurricanes in the southeast last month as well as by the machinists’ strike at The Boeing Company (BA) . That said, those factors were known and figured into expectations of 125,000 net jobs created in October. The BLS also cut its August job creation estimates by more than half to 78,000 and their numbers from September to 223,000 from 254,000. The latter will probably be revised down again in December if recent trends hold.
At the same time, interest rates continue to surge despite the weak economic readings, as the yield on 10-Year treasury moved up to nearly 4.4% by market close on Friday. The treasury yield has now moved up some 75 BPS since the Federal Reserve cut rates at the last FOMC meeting in mid-September. The personal consumption expenditures price index, or PCE, also came in at 2.7% last week. This was slightly over expectations and represented the largest month-over-month gain since April. Hardly what Chairman Powell and the other economic oracles at the central bank were hoping for when they slashed the fed funds rate for the first time since early 2020 by 50 BPS.
All of this does paint the Federal Reserve into somewhat of a corner at their upcoming FOMC meeting on November 7. The credit markets are obviously not buying the central bank’s belief that victory has been attained on the inflation front, but the jobs market is also clearly weakening. My guess is the central bank cuts rates by another 25 BPS. Investors will be listening intently to Fed commentary following the reduction and also by what direction the yield on treasuries will take following this move.
With economic and job growth slowing and interest rates moving up in recent weeks, it points to a potential stagflation scenario, or what Doug Kass would call "slugflation." As they say, "a rose by any other name." I would also note that, for the majority of the country, that does not hold significant real estate and/or stock holdings whose appreciation in recent years have offset price surges elsewhere, this environment has been playing out for quite some time at this point.
This is why we have a record number of Americans holding second or even third jobs to make ends meet throughout 2024. Perhaps the most depressing part of the October BLS jobs report was that 144,000 men over 70 rejoined the labor force last month, on top of the 191,000 that did so in September. The figure now stands at a record 3.15 million. Somehow, that metric doesn’t scream "healthy economy" to me.
I believe stagflation or slugflation will become more apparent to the rest of the nation and the markets in 2025. In Wednesday’s column, I will toss out some investment plays that should be able to successfully navigate that economic environment.
At the time of publication, Jensen had no positions in any securities mentioned.