• Funds Blog
• November 17, 2024

The Time for U.S. Rate Cuts Is Not Yet Ripe

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As the global temperature reaches unprecedented heights, economic indicators across numerous markets are also reflecting a similarly heated atmosphereThe summer of 2023 has brought not only soaring temperatures in many parts of the world but also a surge in employment figures in the United States that set historical recordsDuring the first week of July, data revealed that American businesses added nearly 500,000 new jobs—significantly surpassing the expected 225,000 positionsWhile this strong employment growth paints a robust picture of the labor market, the Federal Reserve, led by Chairman Jerome Powell, continues to grapple with the challenging task of controlling inflation while striving to stabilize the U.Seconomy.

Powell has indicated that the prospect of continued interest rate hikes remains on the table, pointing to economic data from the previous quarter that exceeded predictions: “If you look at last quarter’s data, you’ll find economic growth that was stronger than expected, a labor market that is tighter than anticipated, and inflation rising above what we foresaw… Therefore, we cannot rule out the possibility of another rate increase at upcoming policy meetings.” Such sentiments echo across financial markets, reflecting a palpable concern among investors as they navigate this complex economic landscape.

Moreover, the realm of bond yields mirrors the rising temperatures outside

As the air conditioning units hum loudly in corporate offices across the nation, the bond market has shown little signs of cooling down, achieving the highest yields seen in yearsFor instance, the yields on U.Stwo-year and five-year Treasury bonds have reached levels not seen since 2007, causing waves of analysis and speculation among economists and investors alike.

In terms of performance, longer-term bonds have been faring better than their short-term counterparts, with the yield on the ten-year Treasury bond increasing by 20 basis points while the yield on the two-year bond has remained stagnantThis unusual trend raises eyebrows, as typically, higher long-term yields signal a tightening of monetary policy, often followed by a retraction in economic growth.

Investors Hesitate as U.SMarkets Remain Stable

In the equity markets, particularly within the U.S., there has been little movement despite the backdrop of significant economic changes

• Bolstering Low-Altitude Infrastructure
• Nasdaq 100 Set for Significant Breakthrough
• The Fed's Internal Rate Debate
• Oil Gains, Stocks Steady, Gold Languishes
• U.S. Stock Indices End Lower

Investors seem to be caught in a dilemma between selling stocks and reallocating towards bonds, reluctant to miss out on potential stock market gainsWith the advent of second-quarter earnings reports, there lies the chance that positive corporate performance could well spark a rebound in equitiesShould companies report results better than expectations, it could serve as a springboard for further growth in the stock market.

Furthermore, the recently released economic data has been predominantly positive, especially regarding the service sector's performance, fostering a heightened confidence among investors in their holdings, leading them to refrain from rushing into sellingThe discrepancy between the Nasdaq Composite Index's recent performance and the uptick in ten-year Treasury yields adds another layer of complexity, as rising long-term rates typically exert downward pressure on growth stocks, particularly within the tech sector.

Debate Over Potential Rate Cuts Intensifies

Amid the evolving economic landscape, debates have surfaced over whether the U.S

is experiencing a full employment recessionThe recent strong job data has underscored a paradox wherein robust labor market indicators exist alongside signs of economic contractionIf a recession truly exists, the ramifications could be severeEconomic growth is a nuanced and technically complex concept, inherently linked to the discrepancies between Gross Domestic Product (GDP) and Gross Domestic Income (GDI). The latest GDP figures have exceeded market expectations, while GDI data suggests that the country has been in a recession since the fourth quarter of 2022. This dichotomy complicates the Fed’s interest rate strategy, rendering the timing for rate cuts premature when taking into account the ongoing core inflation and strong employment figures.

The discourse has evolved further, examining whether the Federal Reserve possesses effective tools in the form of interest rates to combat inflation within the U.S

economyUnlike the UK, where mortgage rates adjust frequently, most American households hold long-term fixed-rate mortgagesWhile rising rates pose challenges for businesses, their impact on homes may be less pronouncedAdditionally, the Fed must navigate the ongoing challenge of excessive government spending, which fuels a demand factor that seemingly remains unaffected by interest rate fluctuationsFor instance, estimates suggest that U.Sgovernment spending will increase by 1.7% in 2023 before stabilizing in the following yearAccording to the Congressional Budget Office, the deficit forecast for the U.Sgovernment is set to reach 5.3% in 2023, with further projections implying growth to 6.1% during 2024 and 2025, intensifying scrutiny over fiscal policy.

Looking ahead, the outlook remains uncertainEven if the U.Seconomy teeters on the brink of technical recession, the dynamics of inflation and full employment appear likely to persist

If economic growth slows considerably, the Fed’s capacity to act may diminish as it strives to balance the effects of high core inflation against a labor market that is drawn closer to full capacityEssentially, it seems that, at this crucial juncture, the Federal Reserve may have to reconsider its ability to use rate hikes as a means to cool down overheating economic conditions and escalating prices, given that such measures may not effectively resolve the underlying issues at hand.

Earnings Reports Indicate Expected Outcomes for Leading Companies

Major Financial Institutions Highlight Third Quarter Economic Challenges

As the previous week unfolded, America’s pivotal financial firms began reporting quarterly earningsWith regards to June's Consumer Price Index (CPI) report, market consensus anticipates a month-over-month inflation rise of 0.3%, while core inflation is expected to remain at approximately 5.0%. Unless we see a substantial drop in inflation rates, it is almost certain that the Federal Reserve will raise its policy rate by 0.25 percentage points in the upcoming meetings.

Reports from leading banks such as JPMorgan Chase, Wells Fargo, and Citigroup indicate that the third quarter may present significant challenges for the U.S