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On the latest edition of Market Week in Review, Chief Investment Strategist for North America, Paul Eitelman, discussed the minutes from the U.S. Federal Reserve’s (Fed) July policy meeting as well as key watchpoints for investors at the annual Jackson Hole, Wyoming, economic symposium. He also shared the overarching themes from the latest PMI (purchasing managers’ index) surveys from around the globe.
Minutes from Fed’s July meeting affirm likelihood of September rate cut
Eitelman began by reviewing the recently released minutes from last month’s Fed meeting, where the U.S. central bank signaled it’s likely to begin cutting rates in September. The minutes showed that a “vast majority” of Federal Open Market Committee (FOMC) participants were in favor of a rate cut at the Fed’s next meeting in September, Eitelman said, adding that several members even thought a rate cut could have been delivered at the conclusion of the July meeting.
“The minutes revealed that the tone at the Fed meeting was a bit more dovish than the one Chair Jerome Powell struck at the ensuing press conference,” Eitelman remarked. He noted that Russell Investments has stressed for some time that the case for a rate cut is strong due to moderating inflation risks.
“The Fed looks like it’s coming around to our view, and with labor-market data weakening a bit in recent weeks, a September rate cut appears to be a slam dunk at this stage,” Eitelman remarked.
Key watchpoints at Jackson Hole
Speaking of rate cuts, Eitelman noted that investors will be paying close attention to any further clues from Chair Jerome Powell on monetary easing during his Aug. 23 speech at the Jackson Hole symposium. He said the Fed chair is likely to highlight how moderating inflation and a gradual weakening of the U.S. labor market are changing the balance of risks in favor of rate cuts. In short, Powell is likely to emphasize that it’s time to start the journey of bringing policy rates back down to more normal levels, Eitelman remarked.
Could Powell weigh in on the possibility of a steeper, 50-basis-point (bps) rate cut over a 25-bps one? Eitelman said it’s unlikely the Fed chair will, explaining that the magnitude of the September rate cut will likely hinge on the next monthly employment report, which won’t be available until Sept. 6. In addition, the Fed prefers to take a methodical approach to rate moves outside of emergencies, he stated.
“At Russell Investments, our baseline scenario is that the Fed will deliver steady, 25-bps cuts at each of the three remaining meetings in 2024,” Eitelman said, noting that doing so would give households and businesses a plan to latch onto and easily understand.
Markets have rallied strongly recently as the macro data has stabilized and investors look forward to the potential for multiple rate cuts this year, he added, noting that both the S&P 500® Index and the MSCI All Country World Index are back near all-time highs after a significant selloff earlier this month. U.S. Treasury yields are also down modestly across the curve, Eitelman said, with bond prices up.
Flash PMIs indicate positive economic growth across major economies
Eitelman closed with a look at recently released flash PMIs (purchasing managers’ indexes) in developed markets, which he said provide the first read on the health of the global business cycle in August.
Broadly speaking, these surveys indicated positive economic growth across major economies like the U.S., the UK, the eurozone, Japan, and Australia, he remarked. The growth is being led by the services sector, Eitelman noted, explaining that the manufacturing sector is weakening due to uncertainty over the upcoming U.S. elections as well as softening end-user demand weighing on the cyclical sector.
“Overall, the global economy is grinding through a challenging period, with winners and losers at the sector level,” Eitelman concluded.
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