The Fed decided to pull the proverbial rug out from under investors this week and the market is trying to adjust to the possibility of one or no rate cuts this year. But, is that necessarily a bad thing?
The 1980 movie, "Caddyshack" serves as this week's inspiration. In honor of the recent Masters tournament and the approach of Summer, this film reminds us of the magic of the sport of golf and the seedy side of country clubs. Here's some trivia about the film:
By 1980s standards, this film was a commercial success, earning more than $39 million worldwide at the box office on a meager budget of $6 million. The movie caught Bill Murray and Chevy Chase before they were Hollywood stars and could command larger salaries.
Much of this film was ad-libbed by the actors. The famous "Cinderella Story" scene acted out by Bill Murray wasn't in the script. He simply asked for a row of chrysanthemums and did the scene. Murray and Chase ad-libbed much of the scene where Ty (Chase) hits a golf ball into the shack where Spackler (Murray) lives. Cindy Morgan and Chase improvised much of their romance scene, where the reactions of the actors are real and not in the script.
This movie was Rodney Dangerfield's first movie. He was so unaccustomed to how movies were made that director Harold Ramis had to improvise when a scene involved Dangerfield. In his first scene, Dangerfield did not begin acting when Ramis would say "Action." Finally, the two worked out their own language so that when Ramis would yell, "Ok, Rodney, do your bit," Dangerfield would spring into action.
Sarah Holcomb, who plays Maggie in the film, disappeared from acting after "Caddyshack." She had appeared 2 years earlier in "Animal House," but the rumors of heavy alcohol and drug use on the sets of both movies likely caused her to have a mental collapse. She was reportedly diagnosed with a mental disorder and lives in seclusion under a different name today.
Here's what we've seen so far this week...
You'll Get Nothing And Like It! The Fed has pulled a good one and not many are calling them out for it. It's true, the market got a little ahead of itself, but the near 180 degree turn by the Fed has led to a pullback in equities - especially interest-rate sensitive equity sectors.
If you'll recall our commentary back in December of last year, we highlighted the Fed minutes that showed at least four members saw 4 rate cuts in 2024 and six members saw at least 3 rate cuts this year. And when we look at the transcript of Powell's press conference in December, Powell responded to the question about timing of the first rate cut by stating, "I mean, the reason you wouldn't wait to get to 2 percent (inflation) to cut rates is that policy would be, it would be too late." Oh, how different things are four months later.
First, 4 rate cuts now looks more like 2. According to rate cut probabilities, the market is pricing in no rate cuts in May, June, nor July. The first rate cut would likely be September, low probability in November, and maybe a 2nd rate cut in December. Atlanta Fed President Bostic commented this week, "We won't be able to reduce rates until towards the end of the year." Did something change on a fundamental basis in the economy, or did the market just not respond as the Fed expected when equities took off in December? Bostic's comments would have been helpful back in December or January.
Second, according to Powell, the Fed wouldn't wait until inflation got to 2% before cutting rates. According to him, it would be too late by then. Well, the February reading for the Fed's preferred measure of inflation, PCE Price Index, was 2.5%. How much closer to 2% does it need to get before cutting rates is too late? Right now, markets are digesting the Fed's "rug pull," but the good news is that the economy is still on solid ground. It reminds me of the famous scene in "Caddyshack" when Judge Smails shuts the door on poor Spalding trying to order food at the turn.
Spalding: "I want a hamburger...no, a cheeseburger. I want a hot dog. I want a milkshake. I want potato chips. I want..."
Judge Smails: "You'll get nothing, and like it!"
Well Mr. Powell, I may get nothing, but I won't like it. Oh, and by the way, since markets were shaken by Israeli attacks on Iran overnight Thursday, you might want to parse your words a little more carefully.
Two Wrongs Don't Make A Right. Despite the Fed and all the noise surrounding interest rates, the underlying economy is sound. Even New York Fed President Williams admitted to as much this week when he stated, "The economy is back on the pre-pandemic growth track. The Fed is data-dependent, and the data have been very good." Even if rate cuts don't materialize until September, markets should follow the strong economic data.
Retail Sales saw a nice bounce back in March, with 4% growth year-over-year and a revision higher for February's number. Retailers, Miscellaneous Stores, Gasoline, and General Merchandise saw the largest increases in March. All of those categories were unchanged or negative back in January.
This is further evidence that 1st quarter GDP will be relatively strong. The Consumer Spending component of the Atlanta Fed's GDPNow projection has been very resilient throughout the quarter. In January, spending was estimated to be up 2.4% and the latest projection is for 2.36%, bringing the overall GDP estimate to +2.9%.
The job market remains strong as both Initial and Continuing Claims came in lower than expected this week. The Philly Fed Manufacturing Index saw a surge for April, with the highest reading since April of 2022 and more than quadrupling the March reading. Inside the report, New Orders surged to a reading of 12.2 (more than double the previous month's reading) and shipments rose, as well. The Fed's Beige Book released this week showed "slight growth" in 10 of the 12 regions, with no regions showing contraction. Just like the Fed, we're data-dependent. We're looking through it and it looks good still. As Ty Webb famously said, "Remember Danny - two wrongs don't make a right, but three rights make a left." Due to the Israeli strikes, equity futures were down as much as 1.6% in the overnight session last night. And yet, equity markets are relatively flat to open this morning's trading session. It's early, but perhaps this speaks to the resiliency of the U.S. market?
Thanks, Judge Smails for nothing...
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