How Dovish Will the Fed Be on Friday? We're Watching These Clues
We're eyeing the August Flash PMI and closely following the Canadian rail stoppage.
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We expect an interest-rate cut in September, but the bigger question for us now is how dovish will the Fed's comments be on Friday.
Boosting the likelihood of a coming rate cut are the Fed meeting minutes from Wednesday and recent economic data, including revised employment numbers from this week that revealed the labor market added 818,000 fewer jobs than previously reported.
But will Fed Chair Jerome Powell sound as dovish as the market hopes?
We can look to some clues, such as today’s Flash August PMI data from S&P Global, which will be released at 9:45 a.m. ET. That report could shift expectations. The Flash Manufacturing PMI is expected to remain in contraction territory with a 49.6 reading, and the market expects a Flash Service PMI figure of 54, down a tick from 55 in July, but still growing. How the composite of those two buckets comes in will be of interest. But ahead of Powell’s comments, the market is likely to place as much focus on the preliminary August job creation and inflation data (compared to the last few months).
Locking in Gains
The S&P 500 is now up almost 10%. That signals the stock market is near-term overbought. Should today’s August Flash PMI report provide further evidence of a cooling economy, odds are the market will move deeper into being short-term overbought. But if this report finds the economy is on stronger footing, it could lead investors to take profits, especially as we approach what has traditionally been one of the toughest months for the market. We took some chips off the table yesterday, by locking in some hefty gains in Axon AXON and Lockheed Martin LMT.
We’ll be sure to break down the report for you, sharing our thoughts on its implications as we do so.
Wild Card: Rail Risks
There is also a potential wild card the market will have to factor in: how long two of Canada’s major railroads will be shutdown. Estimates suggest that nearly a third of the freight handled by Canadian National CNI and Canadian Pacific Kansas City Southern CP crosses the U.S.-Canadian border. At risk is a disruption to several U.S. industries, including agriculture, autos, home building, and energy.
When we hear “disruption,” we worry about new supply chain and inflation woes. The duration of the shutdown will be key to watch, and speak to how much of a headwind the strikes could be to the economy. We will be interested to see how Powell addresses those risks, if he does, in his comments tomorrow.
At the time of publication, the Pro Portfolio was long AXON and LMT.
