Markets settled back down this week as volatility eased and technology stocks rebounded. The question now remains, what is the Fed going to do next month. As is the case with politicians, the media, and the Fed, it's hard to get a straight answer these days. That's why we are so focused on data - not opinion.
This week's musings are inspired by the 1987 song "Smooth Criminal" by Michael Jackson. The song was popular, but not as much as the video. Here's some trivia about the song:
The song sold more than 2 million copies in the U.S. (2x platinum) and nearly 4 million worldwide. It was released on the "Bad" album that had five #1 hits - "Bad, Dirty Diana, I Just Can't Stop Loving You, Man In The Mirror, and The Way You Make Me Feel."
This song was written by Michael Jackson and tells the fictional story of an adept gangster who has hurt a victim that Jackson is speaking to in the first person.
The music video won several awards for the ground-breaking move where Jackson and the other dancers lean forward 45 degrees with their backs straight and feet flat on the floor.
Jackson and the producers of the video came up with the white suit and hat for Jackson to pay tribute to Fred Astaire and the 1953 musical comedy "The Band Wagon."
The band Alien Ant Farm recorded a cover of the song in 2001 that reached #23 on the billboard charts.
"As he came into the window
Was a sound of a crescendo
He came into her apartment
He left the bloodstains on the carpet
She ran underneath the table
You could see she was unable
So she ran into the bedroom
She was struck down, it was her doom
Annie, are you ok? So, Annie are you ok?
Are you ok, Annie?
Annie, are you ok? So, Annie are you ok?
Are you ok, Annie?
Annie, are you ok? So, Annie are you ok?
Are you ok, Annie?
You've been hit by, you've been hit by
A smooth criminal"
Here's what we've seen so far this week..
Smooth Criminal? Last week, markets were still reeling from the Yen "carry trade" that caused equities to sell off initially. This week, all is well. Such is life in the age of social media and instantaneous news.
The Fed has been busy this week trying to put out the fire...or add flames to the fire, depending on your point of view. This week, 4 different Fed members spoke and not one of them agreed on a consistent basis.
St. Louis Fed governor, Musalem, stated "We just have to be confident that the inflation trend is secure."
Well, CPI (Consumer Price Index) dropped for the 4th consecutive month on a year-over-year basis and has remained below 3.5% (the historical average) for the past 10 consecutive months. I'd say that's a trend. Atlanta Fed governor Bostic stated, "Now that inflation is coming into range, we have to look at the other side of the mandate, and there, we've seen the unemployment rate rise considerably off its lows."
However, a weaker than expected Jobs number on Friday of last week sparked fears of a potential recession while the "carry trades" on Yen were unwinding.
Bostic appears to be in favor of rate cuts and so does the market. There is basically a 100% probability of a rate cut next month. But, by how much. Again, the Fed governors seem to disagree. Philly Fed governor Harker actually provided the most specific answer of them all when he stated, "If all of it happens to be as forecasted, I think one rate cut would be appropriate by year's end."
Well, the Fed's "Dot-plot" shows at least 50 basis points of rate cuts in what's left of 2024. Clearly Harker is one of the few in the 25 basis point camp. Finally, Chicago Fed governor Goolsbee stated this week, "When the labor market starts to turn, it tends to worsen fast. Some leading indicators or recession are flashing warning." If that's the case, Why the wait until September? Or, did the unemployment rate rising from 3.7% to 4.3% over the past 6 months escape the attention of Mr. Gooslbee? The misdirection to keep markets off balance is getting old. We'll see what Mr. Powell has in store during the Jackson Hole Symposium next week.
Economy, Are You Ok? One thing I can agree with Mr. Goolsbee on is that some economic data are flashing warning signals.
There is plenty of muscle memory from the 2008 Financial Crisis that was largely driven by the housing market. A data point of concern is the amount of housing inventory. It has recently reached the same level as February, 2008, as the Financial Crisis was just beginning. One reason for that has been the elevated level of mortgage rates. The rate on a 30-year mortgage has dropped more than 70 basis points since May. That's good news, but the lack of movement of houses currently on the market is concerning.
Late last year and earlier this year, the FOMO (Fear of Missing Out) was definitely in play. However, at that time it was fear of missing the upside. Now, it's fear of missing the bottom. Retail investors flows into equities skyrocketed in late July-early August as the market was selling off. Consistent inflows as part of a scheduled investment strategy is smart. However, as is evident in the graphic, inflows into equities recently reached a 12-month high in a matter of a couple of days. This kind of activity is reminiscent of the crazed buying in the Dot.com era.
Much is being made recently of the triggering of the "Sahm Rule." July's Jobs Report showed an uptick in the unemployment rate (as we noted from Mr. Goolsbee) which triggered the Sahm Rule. The rule is triggered when the unemployment rate rises by 0.50 percentage points or more relative to the 3-mth averages of the last 12 months. As with most indicators, it's not perfect. However, it has been fairly reliable over the last 6 decades.
We mentioned in last week's blog post that the uninversion of steepening of the Yield Curve is another sign of trouble ahead. Again, it's not a perfect indicator, but, like the Sahm Rule, has been fairly reliable in pointing toward economic trouble several months after triggering. Right now, the 10-year Treasury Yield and 2-year Treasury Yield are about 17 basis points apart. That distance has widened since last week, but still much closer than it was a month ago.
These indicators are having their effect on the St. Louis Fed's Financial Stress Index. While it has not gone positive yet, it has risen in the last few weeks. Just one month ago, the index was reading -0.80, which would indicate low stress in the financial system. It now reads -0.14. Again, that's not a reason to panic yet, but something we will be closely watching in the weeks ahead. With market volatility having subsided for the time being, we reiterate that now is a good time to rotate from expensive Tech and AI names to high quality or dividend-paying stocks. Next week's Jackson Hole Monetary Policy Symposium may provide more clues on rates.
The ground-breaking video...
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