Stocks rose Monday as the market extended sharp gains following the Federal Reserve’s 50 basis point rate cut last week. The S&P 500 closed up 0.28%, the DJIA was up 0.16% and the Nasdaq rose 0.18%. Despite recent strength, some traders warn about increased volatility over the next few months, citing concerns about the global economy, geopolitical uncertainty, and the U.S. presidential election as key drivers of vol.
S&P 500
sources: Bloomberg, CNBC
Closing snapshot
source: MarketWatch
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Longer-term rates rise in spite of rate cut
As a reminder that the Fed doesn’t have control over all borrowing costs, yields on longer maturity Treasury notes ticked up in the wake of the FOMC’s jumbo 0.5 percentage point cut in the fed funds target rate. The central bank manages short-term rates that banks charge each other for overnight loans, which impacts costs on credit card debt and other floating rate loans. However, the interest rate on a lot more debt is driven by changes in Treasury yields, which are impacted, in part, by where investors think the fed funds rate will go in the future, rather than where it is currently.
While Treasury yields are roughly a percentage point lower than where they were earlier in the year, the longer end of the Treasury curve does not seem to be as aggressive in pricing in future rate reductions as the fed funds futures markets suggest. According to a report in the WSJ, John Madziyire, head of Treasurys at Vanguard said, if the Fed is “not going to be as aggressive as the market is pricing, in that scenario, 10-year yields actually go higher.” Fed funds futures at the CME Group suggest that traders believe that the Fed’s benchmark rate will drop from close to 5% now to just below 3% by the end of next year.
“It is no use saying, ‘We are doing our best.’ You have got to succeed in doing what is necessary.” – Winston Churchill
Dimon is skeptical on a soft landing
JPMorgan Chase CEO Jamie Dimon says he wouldn’t “count my eggs” in terms of a soft landing for the U.S. economy. After the Federal Reserve’s first rate cut in four years, Dimon gives the odds of a soft landing lower odds than “other people.” He’s also unconvinced that inflation is “going to go away so easily, not because it hasn’t come down – it has come down – and it can come down more.” Dimon has cautioned for a long time that inflation could be stickier than some expect, citing deficit spending and the “remilitarization of the world” as key drivers of persistent inflation. In his annual letter to shareholders, he wrote that JPMorgan is prepared for interest rates ranging from 2% to 8%. Whatever happens though, Jamie is assured that “whatever it is, we’ll deal with it.”
source: Bloomberg
China
It’s no secret that China desperately needs to stimulate domestic demand and the Fed’s jumbo rate cut last week gave the People’s Bank of China (PBOC) the perfect opportunity to ease. Strangely, the central bank did little save for a 10 basis point cut in its 14-day lending rate. Given the difficulty China has faced jumpstarting its economy post Covid, its curious why the PBOC would wait to make a significant cut in interest rates.
Bloomberg’s Eric Zhu thinks that officials do not want to give the impression that they are taking cues from the Fed. Alternatively, they may be willing to wait for July rate cuts to work their way through the system. Whatever the case, the currency market has reacted by bidding the yuan up to the highest levels versus the dollar in almost a year and a half.
On the other hand, recent strength in the yen has made the yuan (or Renminbi), much more competitive.
Meanwhile, China’s economy seems to get worse with each new data point that is released, making the strong start to 2024 seem like an aberration. Policy support for the economy has been limited and hasn’t been effective, underscoring the need for urgency as distress signals continue to flash more brightly.
source: Bloomberg
What interest rate cuts have meant for stocks
Since the 1980s, investments in stocks and corporate bonds have generally fared well in the 12-month period following the Fed’s first rate cut. However, it all depends on the economy. In times when growth is sustained or boosted by rate cuts, corporate profits tend to increase. But if the cuts aren’t enough to prevent a recession, assets tend to be subject to sharp declines, like the 2008 GFC and the early 2000s dot-com bust.
source: WSJ, FactSet
Movers
Apple stock moved above its 50-day moving average on positive comments abouts the iPhone 16, following concerns last week of underwhelming demand.
After consolidating for three weeks, Facebook parent, Meta Platforms, has been on a tear, rallying 7% last week. Meta has rallied 18% since its earning report, in which it reported that it has pivoted from the metaverse to AI.
EV maker BYD is up over 13% in 2024 as the company battles with Tesla for the lead in electric vehicle sales.
source: IBD
In other news:
Friday: The Commerce Department will report on personal income and consumer spending in August. The report includes the Fed’s favorite inflation gauge, the personal consumption expenditures price index or PCE.
Private equity firm Apollo has offered an investment up to $5 billion to Intel, in support of its efforts to make a comeback.
Chip making giants TSMC and Samsung have discussed building huge factory complexes in the UAE, at a cost of over $100 billion.
JPMorgan overweights Micro Technologies in front of its earnings release. The bank retains a target of $180, almost double last Friday’s close.
Tesla shares rose 4.8% Monday after Barclays reiterated its “equal-weighting” on the EV maker.
sources: WSJ, CNBC, Bloomberg, Forbes, IBD
The stinger
Disclaimer
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