Two or three?

The month of September witnessed heightened volatility early in the first week after lower-than-expected prints of economic data fueled the narrative that the economy might be running out of steam faster than previously expected and the US Federal Reserve is behind the curve. The expectations for non-farm payrolls data for August (reported in September) were at an addition of ~162.83k jobs; instead, the reported number was weaker at ~142k jobs. The Institute of Supply Management’s (ISM) Manufacturing Purchasing Manager’s Index (PMI), a gauge of manufacturing activity, was also lower-than-expected at +47.2 (expected +47.6). However, ISM Services PMI was marginally higher at +51.5 (expected +51.3). Weaker economic data on top of a revised labor market report from Bureau of Labor Statistics (BLS) in late August that showed that economy had added much lower jobs than previously reported between April 2023 to March 2024, exacerbated concerns around the increased likelihood of a potential recession. Consequently, the fixed-income investors baked in expectations of a 50 basis-points cut from the United States Federal Reserve for the Federal Open Market Committee (FOMC) meeting on 18th September.

The United States Federal Reserve Chair, Jerome Powell, had been emphasizing for some time that the health of labor market health now weighs more over the inflation in the committee’s decision as inflation has become less of a concern in the previous few months. Keeping true to the Fed chair’s message of “we do not seek or welcome further cooling of labor market conditions” during a speech in the late August, the United States Federal Reserve did not disappoint the investors and delivered a 50 basis-points rate cut to start the policy rate cut cycle on 18th September. However, the committee appeared divided on the remaining number of cuts needed (two or three) through the end of year 2024 (See Figure 1). Each dot shows the expectation of a Fed policy maker for the rates at the end of respective year. Supportive comments and action from the central bank authorities; benign inflation data; better-than expected retail sales put together with no further alarms from the interim jobs data reported through the month (jobless claims); helped the North American markets more than recover from the initial setback and both the equity and fixed income asset classes ended the month on a positive note.

Figure 1: Federal Open Market Committee Dots Plot

18th September 2024

Source: Bloomberg

The balance of reported economic data has continued to be positive in the early October so far; but stronger-than-expected labor market data has forced the investors to dial back expectations of rate cuts in the United States. The change in non-farm payrolls for September (reported in October) was at +254k, much higher than expected +145.5k. As of this writing, the fixed income investors have reduced expectations to two policy rate cuts from the US Federal Reserve through the year-end 2024 from three rate cuts around the meeting date in September 2024 (See figure 2). While the bond yields in Canada have moved in sympathy with the yields in the United states; in contrast, the chatter amongst the industry participants of a jumbo rate cut (50 basis points) has increased as Canada’s headline inflation is down to +2.0% in August (reported in September) from +2.5% in July (reported in August) and unemployment rate has ticked up to +6.6% in August (reported in September) from +6.4% in July (reported in August). The Bank of Canada meets on 23rd October to decide on the next policy move.

Figure 2: Estimated Number of Moves Priced in for the US - Futures Model

December 2024 meeting 

Source: Bloomberg

Looking ahead, we note that geopolitical tensions have increased and election uncertainty in the United States could be a source of short-term volatility in the markets. In addition, the ebb and flow of economic data could also continue to shift investors positioning between expectations of two or three cuts through the year-end and bring some near-term volatility. However, the balance of economic data and supportive stance from the central banks continues to favor an overall constructive outlook on the markets, in our view.