A broadly lower week for both the stock and bond markets as investors grapple with the outlook for interest rates. ‘Higher for longer’ was the headline of choice by week’s end as investors started to dramatically cut any expectation of rate cuts late this year or next. As these things usually work, the Fed meeting on Wednesday was the catalyst, and there were a couple related moving parts to the meeting.
First, the Fed updated their economic projections for the next three years or so, and the key takeaway is that the Fed doesn’t see inflation getting back to their target until 2026, as you can see below.
They also revised higher their growth expectations and lowered their view on unemployment. The moves weren’t dramatic and not really that surprising, but it did lead to the second takeaway from the meeting.
Namely that the odds of any rate cuts in 2024 are slim. The chart below is from June of this year and shows where the members of the Fed thought rates would be in 2024, 2025, and beyond. Focus on the green line. In 2024 the average expected Fed Funds rate was roughly 4.5%, roughly a full point below where rates are now.
The chart below was updated after Wednesday’s meeting. The expectation for 2024 is now up to 5.25%.
Basically, the Fed is signaling that rate cuts next year are awfully unlikely. This isn’t a new thought either, but this whole move higher in expectations for 2024 represents the Fed abandoning the idea that their interest rate hikes will cause a dramatic economic slowdown. Join the club!!!
As one would expect, longer-term bond yields hooked higher on this news. 10-year yields touched 4.5% at one point this week, while 2-year yields closed above 5.10%.
And the economic data released this week just reinforced this trend. For example, weekly unemployment claims fell to one of the lowest levels in modern history.
And if anything, growth in the U.S. might be picking up, something few would have expected just a couple months ago.
All in all, this week’s market moves are basically investors pricing in the ‘higher for longer’ thesis. Up until now they were basing rate expectations on history. As you can see below, prior rate hike cycles were soon followed by cuts. After all, monetary policy, despite all the pseudoscience around it, basically entailed hiking rates until something broke, then cutting them again to fix the problem.
Now the thought is that rates will plateau for some time to come. Of course, this view could be just as misguided as the expectation for a quick round-trip in rates. But for now stocks and bonds are pricing off this narrative.
(Other) Charts We Found Interesting
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U.S. bond yields going back to 1790. It seems like the word ‘average’ is doing a lot of heavy lifting here.
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Annual bond returns going back to 1800. We could set a record this year by posting a third consecutive loss.
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How worried should investors be about a government shutdown? Probably not that much if everyone is talking about it.
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The longer the autoworkers strike goes on, the higher used car prices are likely to go.
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There is always a bull market somewhere – Uranium edition. Prices are soaring in part due to supply problems. A lot of the stuff that’s dug out of the ground happens to be in tricky parts of the world.
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And more news about rocks. Geologists have uncovered what they believe could be the world's largest lithium deposit inside an ancient supervolcano along the Nevada-Oregon border. Lithium concentrations could be nearly double those found in the Bolivian salt flats, currently the largest known source of the metal.
Have a good weekend
Charles Blankley
Principal
Chief Investment Officer
Gemmer Asset Management LLC
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