Market Update: August 22nd, 2024
Below is your weekly market update from Cantorbridge:
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MARKET UPDATE | AUGUST 22nd, 2024
Federal Reserve's Current Stance:
Fed likely reached the peak of the interest rate cycle; focus shifting to monetary easing.
Inflation remains higher than desired; large deficits affecting consumption and unemployment.
Other central banks prioritizing labor markets over inflation mandates.
Interest Rates and Currency Dynamics:
With interest rates peaking, the dollar has likely peaked as well. This shift has led to varying impacts across different currency baskets. Commodity producers and emerging markets are benefiting from higher commodity prices, while developed markets face more uncertainty due to large deficits and political instability.
Possible rate cuts by the end of the year; could range from two to four cuts. Recommendation to extend duration on fixed income deposits to lock in yields.
Dollar and Currency Comparison:
Dollar has likely peaked; comparisons made with commodities, emerging market currencies, and developed market currencies.
Mixed performance across these baskets; emerging market currencies generally holding up well.
Commodities:
Gold has performed well over the past three years, reflecting global currency debasement.
Gold’s value is driven by monetary and fiscal policies, not industrial use.
Other resources like copper and natural gas have significant growth (both in use and projected future use).
Economic Growth and Emerging Risks:
U.S. economic growth has slowed but remains in positive territory. However, there are rising concerns about unemployment and increasing delinquencies, particularly in credit card and auto loans. Additionally, the upcoming resumption of student loan payments could further strain consumer finances and increase defaults in other sectors.
Payroll Data Revisions;
BLS revised payroll numbers significantly downward, impacting perceptions of economic health.
Adjustments indicate weaker job growth and highlight inconsistencies in previous data.
Delinquency and Credit Trends:
Increased delinquencies in credit cards and auto loans.
Student loan repayments set to resume in November, potentially adding stress.
Inflation and Market Outlook:
Although inflation data suggests that the overall rate may stabilize in the short term, there are factors—such as rising goods inflation—that could drive it higher again. As a result, the Fed is likely to pursue gradual rate cuts in upcoming cycles.
Market Expectations and Federal Reserve Predictions:
The bond market's expectations for rate cuts have fluctuated, reflecting the ongoing uncertainty. While a soft landing remains the most likely scenario, the risk of a hard landing is still significant, particularly if inflation remains stubbornly high or consumer stress escalates.
Higher inflation leads to lower profit margins and P/E ratios.
Preference for companies with strong cash flows and real assets, such as utilities, energy, materials, and select real estate sectors.
Global Financial Dynamics:
US Treasury increasing fiscal spending, leading to more dollar liquidity and rising equities.
Unclear which force—Bank of Japan or US Treasury—will have a stronger influence on markets.
Global Impact of the Bank of Japan:
Recent changes in Bank of Japan's policy, including rate hikes and quantitative easing reductions.
Effects include strengthening of yen and adjustments in global liquidity.
As you know, if you have any questions or would like to talk further about anything, don’t hesitate to give me a call!
-Chris Rasmussen