Fed Watch – 10/4/2024

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

Hello, thanks for joining us for this edition of Fed Watch. Today is October 4th, 2024. And what I thought we were going to be talking about, and that would be the implications of the Longshoremen’s strike came off the board last night when they agreed to attend to 62% increase in wages. That was going to have some interesting effects, but all that’s gone by the side, unless they end up going out on a strike mid-January because they can’t reach a final settlement.

So that means we have to look at the economics. And the economics, my friends, for August and September continue to be weak, making the Fed look prescient in terms of the interest rate decline that happened in September. And the purchasing managers index weakened in September. The 1/12 rate of change fell into phase D, so it’s running below the zero line and getting worse. Our own ITR leading indicator weakened for a second consecutive month. Corporate bond yields reflecting that weakness declined to 4.82%, so that’s good. We’re getting some interest rate decline beyond just the Federal Reserve.

But, you know, when you looked at mortgage rates, et cetera, when the Fed lowered interest rates, there wasn’t a commensurate decline. I think it had already been baked into some of these market numbers. The ITR retail sales leading indicator weakened markedly in September. It’s now at the slowest level in six months, that’s an “uh-oh”. And that may mean we have to revisit our retail sales forecast at ITR Economics.

Manufacturing new orders weakened in August. The 3/12 coming in, showing that activity was down 0.9% year over year. The 12-month moving average data trend is now in negative territory. Although the decline is milder than normal, it clearly is in negative territory. And let me double back on that. Someone sent in a question following a recent Fed watch, because I had made the comment that the Fed can lower interest rates without there being an actual recession. And I was taking the task a little bit on that because manufacturing has been in a recession. That 12-month moving average is at its lowest level in 23 months. So about a two-year extended decline. But it’s been the mildest decline on record. And some parts of manufacturing are feeling it grossly negative. And some other parts of manufacturing are not feeling any pain at all. And it’s really mild, it’s going to be that way unfortunately. Some folks are indeed out there suffering and probably was not being empathetic enough toward them.

Non-Defense Capital Goods New Orders reflected the same weakness as manufacturing new orders, that was down 0.2%. 3/12 is at minus 0.6%, it is also in phase D. And that’s the lowest 3/12 we’ve seen in just about four years, three and a half years.

Automobile retail sales, light vehicle retail sales in the U .S. in September, they were just bad. I mean, the 1/12 came in at a minus 12.8% very disappointing results. That’s the worst 1/12 we’ve seen in over two years. We’re getting very sluggish month-to-month percent changes. And while the 1/12 is really nasty, and obviously it’s going to stand out, especially if you get the ITR Trends Report, the somewhat exaggerated the negativity because last year was a better performing month on a month-to-month basis.

But you look at employment, we’re back to looking at some very sluggish behavior that 1/12 rate of change for employment is at 1.4%. It’s been there for the last three months, but it’s just not going anywhere as fast. And we got some negativity in the stat four. That’s the month-to-month percent change. That is not indicative of an economy that’s doing anything but battling to make some headway. Bizarrely, the unemployment rate, not seasonally adjusted, dropped to 3.9% and even seasonally adjusted. It went from 4.2% down to 4.1%. That’s with September data.

So, there’s a disconnect going on there because of the two different data sources. Our best bet is we’re going to get some more interest rate decline out of the Fed. We’re also going to get some more interest rate decline out of the marketplace. This weakening trend is expected to continue through 1Q2025. The Fed next meets on November 6th and 7th, which is interesting timing given the election of November 5 and who knows maybe we’ll actually know who’s the president and who’s in Congress by November 6th and 7th if all goes well.

I can’t see the Federal Reserve lowering interest rates in November 6th or 7 unless the October numbers come in really bad. They’re more likely to hold off until December. That would be my odds on bet anyways at this time.

Another question that we got recently was, why are we calling for re-accelerating inflation beginning in 2026? I’m going to address that very issue in this month’s October’s issue of the ITR Trends Report. You read the protracted answer there, but please understand this, either side is talking about tariffs, one more than the other, but tariffs are indeed passed through to the consumer by and large. That means higher prices, that’s a form of inflation. It isn’t always labor-driven inflation, it isn’t always fiscal policy inflation. Sometimes it’s trade policy inflation. That is a factor in our thinking about higher inflation down the road, which means, and on how long these interest rates are going to come down and how much they’re going to come down.

As we’re cruising through the first half of 2025, our advice continues to be, if you’re going to leverage, grab those interest rates, whether it’s for your home, for your business, banks or property, those are probably going to be the best interest rates you see for a very long time.

That’s today’s update, October 4th, 2024. Thanks for watching.