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The Fed’s annual symposium in Jackson Hole, Wyoming, kicking off yesterday, will keep traders on edge over the next few days. The Fed often uses the Jackson Hole meeting to elaborate on its expected policy path for the months ahead. Furthermore, they expound on their economic views and the economic data points most likely to impact the Fed’s thinking. Therefore, with the Fed on the cusp of easing, this meeting will shed more light on their longer-term Fed Funds outlook.
While many speakers will address the audience at Jackson Hole, including Fed members, guest economists, and other nation’s central bankers, the most important will be Jerome Powell. He is slated to address the conference on Friday. As discussed below, hearing Powell opine on yesterday’s massive downward revisions to the BLS employment data will be interesting. Had they known that there were 818k fewer jobs formed, would they have favored lowering rates before September? Moreover, does the revision provide more impetus for the Fed to cut in larger increments? The table below shows the market, before Powell’s speech, is assigning 100% odds of a rate cut in September, with a 34% chance they cut by 50bps. Furthermore, Fed Funds futures imply 1% of easing by year-end.
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Market Trading Update
“This market just won’t stop going up. It’s crazy.”
I got such an email this morning. As noted yesterday, mounting bullish signals support the market currently as momentum builds. Of course, corporate share buybacks are certainly helping.
“BofA corporate client buybacks continued to track above seasonal levels as a % of S&P 500 market cap for the 23rd straight week, and YTD, are on pace for a record year in our data history.”
With Jerome Powell’s speech from Jackson Hole tomorrow, the markets will likely continue to hold above the 50-DMA while awaiting his comments. If Powell suggests a move dovish poster, such could quickly send stocks to all-time highs. A more hawkish tone could result in a short-term pullback to support at the 100-DMA. With the markets on a bullish buy signal and not dramatically overbought, there is certainly potential for further upside if resistance at previous highs is removed. The downside risk is fairly contained with several levels of key support.
Until we get through Friday, and into September, continue to manage portfolio risk for now. Around mid-September, we should have a clearer view of market health and what actions must be taken next.
The Labor Market Was Weaker Than Advertised
Yesterday, the BLS revised the prior year’s employment data (April 2023-March 2024) lower by 818,000 jobs. With the revisions, job growth over the period was 174k, not the 242k initially reported. That puts average monthly job growth at about 20k less than the run rate from 2012-2019.
As shown below, professional and business services accounted for nearly half of the revision. The second graph, courtesy of ZeroHedge, shows that the revision was much more significant than prior years.
New Bussiness Formation
One reason for the lower revisions is poor data on new business formations. The so-called birth-death rate forecast, which feeds the BLS employment data, accounts for new jobs resulting from new businesses. At first blush, as shown in the first graph below, it may appear that people are starting new businesses faster than before the pandemic. However, the second graph shows that the new companies may have been Door-Dash, Instacart, and Uber Eats drivers, not new businesses.
Fed Funds Futures Offer Bond Market Insights
Profitable bond trading opportunities arise when your expectations about Fed policy differ from those of the market. Therefore, with the Fed seemingly embarking on a series of interest rate cuts, it behooves us to appreciate how many interest rate cuts the Fed Funds futures market expects and over what period. Equally important, Fed Funds futures help us assess the market’s economic growth and inflation expectations.
Currently, Fed Funds futures imply the Fed will start cutting rates in September and reduce them by 2.25% to 3.09% in early 2026. From that point, the market expects the Fed to slowly increase Fed Funds to 3.50%. The limited rate cuts and relatively high trough in Fed Funds tell us the market is not pricing in a recession but a normalization of GDP with inflation running at or slightly above the Fed’s 2% target.
If the Fed Funds futures market is correct, the upside in bond prices may be limited, especially compared to prior easing cycles. However, suppose the market underestimates the probability of a recession or a sharper-than-expected inflation drop over the coming few years. In that case, there is significant upside potential in bond prices.
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