This is the week for which so many realtors, mortgage brokers as well as consumers have been waiting. It couldn’t come any sooner for those in the first two professions: housing starts are at a 50-month low and the number of real estate agents and brokers has dropped to the lowest level since 2014.1 The overwhelming odds are that Jerome Powell and the Federal Reserve will be lowering rates this Wednesday after Powell in his Jackson Hole speech bluntly stated that they would be shifting their policy and cutting rates. The question now is: by how much? The Fed Funds Futures Target Rate Probabilities for the September 18th Fed meeting has 59% of the bets with a target rate of 4.75% to 5.00%2. As we’re currently at 5.25% to 5.50%, this implies a cut of 0.5% or 50 basis points. 41% believe the rate cut will be limited to a quarter point or 25 basis points.
Whether they go with a quarter-point or half-point rate cut likely won’t shift too much in the stock market as this move has been well telegraphed by the Fed. Looking longer into the future, the general consensus of 51% of futures owners believes that rates a year from now will be somewhere between 2.75% to 3.25%. Those of you pondering a house purchase, a refinance or even a financed car purchase would be well advised to bide your time until the Fall of 2025. The impact on the bond market will likely be the most significant as it relates to your portfolios. A move that big inside a year would dictate that bond prices should be moving up. As we tell you all so often in our meetings: you want to catch the see-saw (or teeter-totter if you’ve listened to Ed) on the way up for bond prices, not the other way around. As a reminder from last week, we’ve recently stepped out a little bit on the yield curve on our Tactical Fixed Income Portfolio in response to this. Those of you who haven’t called us yet on this subject, please reach out to us at WTA so we can make sure you are properly positioned for this move in rates. We’re also seeing drops in guaranteed income payout rates from insurance carriers. If you have not locked in enough guaranteed income to your liking, please call us as soon as possible, as the window for getting the best income for your money is beginning to close.
We received more manufacturing data this morning. The Empire State factory gauge is an important tool the Fed uses to assess economic activity. The reading this morning was projected to be a negative 5, and we got a positive 11.5, which is 16.5 points higher. This would imply a manufacturing picking up quite a bit. The change from last month to this month was so stark, however, that it can best be described as “odd”. Hopefully we’ll get some more data points in this direction on manufacturing. Until we get more corroborative data though, we remain skeptical of a big move there.
After another assassination attempt this weekend, we are more mindful of the political discourse reaching a fever pitch surrounding the election. As we pray for an end to the violence, our job here is to monitor the volatility of the markets in relation to that. It’s up around 5% (the VIX) as of the writing of this Monday morning, but we’ll be watching that closely and may be in touch with you if we see a sustained spike. Please call us to express any concern you have for the markets and for your financial future.
Sincerely,
The WTA Investment Committee
1Source: The Kobeissi Letter @KobeissiLetter
2Source CME Group “Fed Watch”: https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html.
