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The rate cut seen and heard around the world yesterday has fostered quite the response today -- even though it was initially met with some stifled enthusiasm yesterday.
Briefly, the Fed voted 11-1 to cut the target range for the fed funds rate by 50 basis points to 4.75-5.00%; the Summary of Economic projections showed a median estimate for another 50 basis points of rate cuts this year and another 100 basis points in 2025.
The kicker is that Fed Chair Powell, in explaining the cut, said everything is fine. It was such an odd declaration on the heels of a 50-basis points rate cut that, in the past, has been reserved for a time when everything was most definitely not fine.
He also said (repeatedly) that the move was a "recalibration" of the policy setting, that the Fed is not on a preset course, and that one shouldn't look at the recent cut and think, "oh, this is the new pace." He concluded with an acknowledgment that he doesn't see anything in the economy right now that suggests the likelihood of a recession, or downturn in the economy, is elevated.
The rate cut, however, was intended to make sure everything remains fine.
In related monetary policy news today, the Bank of England left its key interest rate unchanged at 5.00%, as expected; the Hong Kong Monetary Authority raised its key lending rate by 50 basis points; and the Norges Bank left its key policy rate unchanged at 4.50%, as expected, and said it is likely to stay there through year end.
It is the Fed decision, though, that is resonating this morning. That, and a bit of buzz after T-Mobile's (TMUS) CEO said the first week of iPhone 16 sales has been better than last year's models. Shares of Apple (AAPL) are up 1.9%, part of a mega-cap rally in pre-market trading that has contributed to a rally in the equity futures market.
Currently, the S&P 500 futures are up 88 points and are trading 1.5% above fair value, the Nasdaq 100 futures are up 413 points and are trading 2.0% above fair value, and the Dow Jones Industrial Average futures are up 463 points and are trading 1.1% above fair value.
The move in the futures market can be attributed in part to a "flat squeeze." Investors sitting on sidelined cash are moving to put that cash to work in a fear-of-missing out trade. That fear is elevated this morning because the fading price action seen yesterday into the close likely spurred some thinking that there would be follow through to the downside today given that the market had already rallied on the speculation the Fed would cut by 50 basis points.
That hasn't happened. Doesn't mean it can't happen, yet the direction of travel for the equity futures market makes it clear that it will be a robust start that carries the Dow and S&P 500 into record territory.
There was some "fine" data this morning, too, not including the Q2 Current Account Deficit of -$266.8 billion.
What was fine -- or even better than fine -- was the weekly initial jobless claims report. The Philadelphia Fed Index for September was a bit weaker than expected at 1.7 (Briefing.com consensus 3.0), but that was fine because it was up nicely from the -7.0 reading for August and also signified an expansion in manufacturing activity, clearing the expansion/contraction demarcation line of 0.0.
Initial jobless claims for the week ending September 14 decreased by 12,000 to 219,000 (Briefing.com consensus 232,000). Continuing jobless claims for the week ending September 7 decreased by 14,000 to 1.829 million.
The key takeaway from the report is that there is nothing in the low initial claims reading that, as Fed Chair Powell might agree, suggests the likelihood of a recession, or downturn in the economy, is elevated.
Of course, that gets us back to the Fed's decision to implement a larger 50-basis points cut to get things started on its easing cycle. Stocks seem to fancy that decision. Treasuries? Well, maybe not so much. The Treasury market is looking a little leery of the possibility that the aggressive rate cut at a time when everything is fine could re-ignite inflation.
The yield on the more inflation sensitive 10-yr note is up seven basis points to 3.76%, having jumped five basis points in the wake of the very fine initial jobless claims report. It is up 12 basis points from yesterday's low.
It will be important for a fully valued stock market that the Treasury market keeps any inflation fears in check.
