Expansion, Contraction and Return

    Once again, we’re facing a market that seems content to lure buyers on the notion that if the economy is growing that’s a reason to buy, and if an economy is slowing, the Federal Reserve will lower interest rates and that’s a reason to buy. When economies grow businesses invest, GDP stays firm, consumer spending rises, and optimism prevails. When an economy peaks, it’s usually because wages and prices are rising too quickly, consumers and businesses are cutting back on spending. When the economy slows, economic data show signs of slowing, which brings GDP down. Businesses reducing spending may include a reduction in hiring as well, putting upward pressure on the Unemployment rate. In presenting the economic cycle this way it is better understood that markets shouldn’t react favorably to slowing economies, not until the Federal Reserve lowers rates, but when that action produces results.

 

    In the meantime, on the back of today’s Bureau of Labor release of downward revisions of previous months of payroll growth, the likelihood of the Fed lowering rates is making traders and their AI buddies happy. But, tomorrow and Thursday, data for the Producer Price Index (PPI) and the Consumer Price Index will be released. This is important, because last month showed PPI above 3% year over year and is expected to remain at that level. CPI, which came in last month at 2.7% is expected to increase to 2.9%. This outcome would likely cause the Fed some pause as both indexes are moving away from their much publicized goal of 2%. A level, which everyone knows, makes little sense to me. Add to that, oil remains near a level not seen since 2021, when oil spiked and inflation spiked with it. This week the Organization of the Petroleum Exporting Countries (OPEC) raised output, which should place some stability on prices, especially as the West enters the colder seasons. Non- Manufacturing industries, which provide services such as Healthcare, Finance and Hospitality, has remained above 50 at 52, which suggests expansion over contraction. Personal Income rose in July to 5% year over year along with Spending which increased 4.7% for the same period. Enough to keep prices rising, or can the moderation seen in Manufacturing data be the stabilizer I think it will be?

 

    A lot for the Fed to take in at next week’s meeting. Pressure from the Administration doesn’t, or shouldn’t, matter. Likewise, the impact on the economy of lower rates should have less effect on current economic growth, credit card debt may get some relief, as may mortgage rates. Housing might see a rise as debt is the primary financing for that industry. And let’s not forget the Fed has also used other forms of stimulus in the past such as Quantitative Easing. But, in my experience the Fed has only used that tool if rates are significantly lower than they are expected to be by the end of the year.

 

    Which leave us to my final opinion, the economy is showing some slowing and some growth. Payroll growth, while still in the positive range, is under pressure less from companies pulling back on hiring and maybe more on immigration deportation and government employee reduction policies, the former of which is still progressing and latter of which has lost its luster, for now. Overall, the Fed will lower rates sooner rather than later, and while the markets can remain volatile, the bond markets can raise rates without the Fed, if necessary, and if economic growth shows any sign of resuming, the markets will love it, and so will we.