Morning Commentary
Jay Powell & (most) Co. decided to start the rate-cutting cycle quickly, which brought back bad memories for stock market participants yesterday.
The Fed's big start underscores a sense of being late, which I sensed from Jay Powell’s comments, and has merit this time.
I am more confident that the Fed will stick to the landing. I also heard a determination in his voice that gave me comfort. The Fed says the unemployment rate will not exceed 4.4%, which probably means more accommodation.
50 BPS Out the Gate: Too Fast?
|
||||
Date |
Market Decline |
Duration (days) |
UR Increase |
Recession?
|
Jan 3, 2001 |
-39% |
448 |
+2.1 pp |
Yes
|
Sep 18, 2007 |
-54% |
372 |
+5.3 pp |
YES
|
Jay Powell's answer to the first question was explosive. He explained (in italics) why they started fast. I’ve broken up the answer to add context and my thoughts.
So, since the last meeting—OK, the last meeting—we have had a lot of data come in. We’ve had the two employment reports, July and August.
Note:
Not only did the August jobs report miss the consensus, but it also had the worst August job figure since 2017.
We’ve also had two inflation reports, including one that came in during blackout.
We had the Quarterly Census of Employment and Wages (QCEW) report which suggests that maybe—not maybe, but suggests that the payroll report numbers that we’re getting may be artificially high and will be revised down. You know that.
Note:
Economists and the market largely ignored the 818,000 revision. But I saw it and remarked several times that Powell is no fool, and there is no way he and the Fed are taking initial jobs data at face value. Saying the numbers may be artificially high and will be revised down gives me more confidence in the Federal Reserve.
We’ve also seen anecdotal data like the Beige Book.
Note:
We pointed out how monumental and rare it was for the Fed to admit spreading economic weakness in the Fed’s Beige Book. It may be anecdotal and useless for number crunchers, but there won’t be any crazy revisions.
Market Reaction
After initially spurting higher, stocks slipped into the close. Historically, Utilities (XLU) have been one of the worst-performing sectors during easing cycles, while Communication Services (XLC) have been the best.
The selling was somewhat subdued for a Federal Open Market Committee (FOMC) decision day,
I always consider the next day a better barometer of how the Street feels about the decision and pressure.
Market Factors
Large-caps were down due to various factors, but mid-caps got some play, and small-caps fared well overall.
Today’s Session
The market and all its participants had a chance to sleep on the Fed’s decision. This morning, they have decided that Jay Powell is the man for the job.
This employment crisis is not about layoffs – yet.
It’s about a major downside shift in demand and employment attrition, which has been proven to be three quarters of input in rising U3 data.
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