Fed Watch – 9/20/2024

The below transcript is a literal translation of the podcast audio that has been machine generated by Notta.

Hello, I’m Brian Beaulieu. Welcome to the September 20th, 2024 edition of Fed Watch. Thank you for joining. We’ve had a great week, right? I mean, the Federal Reserve lowered interest rates, not just 25 bips, but the full 50 bips. Surprised me, I thought they were going to be more conservative. I don’t see that amount of weakness in the economy that I would have gone the full 50 bips, but they apparently do and they went for it, which is good.

I mean, it’s not going to be some sort of magic panacea for the sluggishness in the economy, but it is going to help. We don’t think they are one and done. Hard to know exactly what’s in their heads, as we all know. But we see the sluggishness in the economy continuing on long enough over the next one, two quarters, that they’re likely going to pull those interest rates down a little bit lower, which means I wouldn’t be in a real big hurry to go out there and leverage the future. If you can wait another three to six months before getting that mortgage, or at least lock it in, rather than, well, it’s not going to be going up, so don’t lock it in. Just take your time on these interest rates. 25 bips more, 50 bips more, which would be great on a mortgage, makes a big difference in terms of affordability. Is the younger people time to save up some more money to get into those homes?

Speaking of homes, the bad data, the disappointing data was in existing home sales in August, was quite weak, and there’d be a tell toward the Federal Reserve being concerned about the housing market, if in, therefore, have some more impetus for lowering those interest rates. The 3/12 rate-of-change was down to 3 9, is in phase D, so it’s still declining, and the July to August percent change was weaker than normal. Single family housing starts, on the other hand, and this is starts, not sales, did great for the month of August, coming up 10%, which is way out of line for normal, from July, but July was so weak that there’s just some time shifting going on there. The overall seasonal decline in starts since the June high, so that’s July and August decline in three months moving total, is still steeper than normal. The good news, however, in that is, steeper than normal does not mean looks recessionary. It just means it’s steeper than normal. That’s the softness, that’s the weakness, but it is not recessionary, and that’s a good note going forward.

Retail sales, the trend in the 3/12 is in phase C, it’s at 2.2%, it’s milder than normal, but at 2.2%, retail sales for the last three months, aren’t even covering the rate of inflation, so adjusted for inflation. Clearly, there’s some sluggishness in the retail sales sector that has to be of concern going into the fourth quarter. Normal dollars, we think the fourth quarter of ’24 will come in above the fourth quarter of 2023. Our forecast is it’ll be about a 2.5 to 2.6% increase year over year, which means we’ll continue to just cover the rate of inflation. Our unit volume isn’t gonna be anything right home about in the fourth quarter.

Total industrial production, August data, 3/12 rate of change remains weak, we can slightly to 0.2%. Overall, we’re in this flat mode for industrial activity and manufacturing. Again, all of which says when you squish all that together, the Fed can and probably will lower interest rates yet again, I don’t care what month, it probably isn’t gonna be November, could be October, they’ll do it before the election, could be the week till December. I’m more interested in how deep into 2025 they’ll go with these lowering of interest rates.

I wanna follow up on a comment I made one or two weeks ago. I said that there’s a potential for correction in the stock market and the numbers that people remember are all over the board. Let me just clear that up. With interest rates having come down, the odds of a, full-blown correction. Remember, correction can be like 10% to 15% decline, half is diminished. The rate of change, I looked at it right before coming on here in terms of the 3/12 rate of change decline is milder than normal, which says that we could have a chop, but it’s just be a couple of percentage points. It would be relatively quick.

And keep in mind, people have a tendency to focus on, oh, it could be a 2% decline, so I’m not going to buy, or a 5% decline, so I’m not going to buy, but you’re giving up all the rise that happens before a maybe correction in the market. And it does look to be less of a probability. It’s certainly less dynamic than it did last time, because those interest rates have come down a full 50 basis points. That makes a difference in terms of the appeal of going elsewhere with the money, with our money.

The other adage or aspect of this that I’d like is that the M2 -112 rate of change is in a better rising trend now. That data is showing some improvement, which argues well for avoiding a real issue in the market. I’m in the market. I fully invested in the market. I encourage other folks to not let a good rising trend go to waste because you’re afraid of a potential clunk out there.

That’s this week’s Fed Watch. Thank you very much for watching, and I look forward to seeing you next week. Same time, same place.