Stock Market Update

[BRIEFING.COM] Today's session started sluggish in front of the afternoon's headline event. The Federal Open Market Committee (FOMC) voted in favor of cutting the target range for the fed funds rate by 50 basis points to 4.75-5.00%. It was not a unanimous vote. Fed Governor Bowman preferred a 25-basis points rate cut.

The directive indicated that the Committee has "gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance."

The Summary of Economic Projections showed a shift in the median estimate for the 2024 unemployment rate to 4.4% (from 4.0% in June) and a downward shift in PCE inflation to 2.3% (from 2.6% in June) and core-PCE inflation to 2.6% (from 2.8%). The dot-plot, meanwhile, shows a median estimate for 2024 (4.40%) that implies another 50 basis points of rate cuts this year and another 100 basis points in 2025.

Fed Chair Powell defended the larger, 50-basis points cut today as a proper "recalibration" to make sure the labor market and the economy remain in a solid condition and that the intent of today's move is to make sure they remain there. He also said that the Fed doesn't feel like it is behind the curve with its policy rate and that the larger cut today can be construed as a sign of the Fed's commitment not to get behind.

There was some whipsaw trading action in the stock market and the Treasury market after the FOMC announced a 50-basis points rate cut at 2:00 p.m. ET and as Fed Chair Powell conducted his press conference, which began at 2:30 p.m. ET.

The major indices hit session highs in response, which marked fresh record highs for the S&P 500 (-0.3%) and Dow Jones Industrial Average (-0.3%), but ultimately settled lower than yesterday. Nine of the 11 S&P 500 sectors closed with declines ranging from 0.1% (industrials) to 0.8% (utilities). The energy (+0.3%) and communication services (+0.02%) sectors were alone in positive territory at the close.

The interesting action was in the Treasury market. The monetary policy rate was cut, and it is likely to get cut again (several times) based on the Fed's own projections. The interesting thing is that Treasury yields, which dropped initially, moved higher, with the 10-yr note yield settling the session higher than where it was before the 2:00 p.m. ET policy decision.

The connection here is that the Treasury market could be pricing in some inflation angst in a curve-steepening trade. The 2-yr note yield settled today's session at 3.60%, up one basis point, while the 10-yr note yield settled at 3.69%, up four basis points. They had traded down to 3.54% and 3.64%, respectively, in the initial wake of the policy announcement.

Reviewing today's economic data:

• The weekly MBA Mortgage Applications Index rose 14.2% with refinance applications surging 24% and purchase applications jumping 5%
• Housing starts increased 9.6% month-over-month to a seasonally adjusted annual rate of 1.356 million units (Briefing.com consensus 1.320 million), bolstered by a 15.8% increase in single-unit starts. Building permits increased 4.9% month-over-month to a seasonally adjusted annual rate of 1.475 million (Briefing.com consensus 1.415 million), aided by a 2.8% increase in single-unit permits.
  • The key takeaway from the report is that single-unit starts and permits were up in every region, reflecting increased activity among builders that has been facilitated by sliding interest rates and pent-up demand.
• The weekly EIA Crude Oil Inventories showed a draw of 1.63 million barrels following last week's build of 833,000 barrels

Looking ahead to Thursday, participants receive the following data:

• 8:30 ET: Weekly Initial Claims (Briefing.com consensus 232,000; prior 230,000), Continuing Claims (prior 1.850 mln), Q2 Current Account (prior -$237.6 bln), and September Philadelphia Fed (Briefing.com consensus 3.0; prior -7.0)
• 10:00 ET: August Existing Home Sales (Briefing.com consensus 3.90 mln; prior 3.95 mln) and August Leading Indicators (Briefing.com consensus -0.3%; prior -0.6%)
• 10:30 ET: Weekly natural gas inventories (prior +40 bcf)