The Fed is set to lower interest rates on Wednesday for the first time since 2020 but the cooling labor and inflation data has the markets debating a 25bps or 50bps move to begin this new cycle. The worry is that the Fed waited too long and the lagged effect of holding rates too high for too long may not appear for several months.
The recent negative revisions to the jobs data in June and July warn a weakening trend in labor may accelerate but layoffs have remained low and jobless claims have not moved much over the past year. However, corporations plan their budgets for the following year in September and make changes to headcount towards the final weeks of the year. Will layoffs accelerate in the coming months? If true, so will the rate cuts into 2025.
There is concern that the inflation monster will re-emerge (think energy), however, this adjacent chart from Pantheon Economics shows inflation peaked in 2022 and is trending lower. We did get CPI (+2.5%) and Producer Prices (+1.7%) this week and that provides further cover for rate cuts given the Fed’s goal of 2% inflation.
The S&P 500
The S&P has been up in five of the past six weeks in anticipation of the rate cuts despite the weak seasonality we normally see in September. There is a technical point of interest where we closed on Friday. If you have been a reader of my blog posts, you will see me using mathematical points of support or resistance based on Fibonacci relationships which are commonly used in chart analysis. This tool also provides extensions from a previous high and low which act like an echo from a previous trading range.
If you look at the top of the chart, I have highlighted the 161.8% FIB extension (yellow line) that is an echo of the January 2022 high and the October 2022 low. You can see in the upper right hand corner of the chart that the S&P touched this line in mid July only to be rejected where three weeks of selling ensued before a bottom was reached on August 5th. The current rebound from the August low closed at this resistance line on Friday. And now we wait for the Fed and forward guidance on rates.
The stock market has loved low rates since the financial crisis but history also tells us that easing cycles preceded a slowdown in the economy. For now, we can watch for a breakout of this level next week and if that happens it would be a bullish technical event for the market. Stay tuned!!
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