The Fed was behind the curve.
Markets are counting on 4 rate reductions this year and were hoping that the Fed announcement this week would add to those expectations. The Fed announcement and then Chairman Powell’s news conference did not deliver. The Fed announcement moved from indicating possible increases to confirming expectations of lower interest rates ahead, just not now and maybe not in March. The sell off on Wednesday was immediate for markets and those averages that had the largest gains since the last quarter of 2023 declined the most. In addition to the Fed announcement, we have technology earnings announcements by the big technology companies. Microsoft earnings looked very strong, but Google showed declining sales in China, a large market. Today’s earnings included Facebook which declared a dividend for the first time, Amazon which delivered up to expectations resulting in gains in afterhours trading.
Facebook is up 15% afterhours post earnings announcement. One of my rules about Fed announcements is more important than market move the day of announcement is market moves the day after. After the big sell off on announcement day, sure enough markets rebounded today with the SP500 nearing 5000. This is an expensive market regardless of the data used but markets can stay expensive for long periods of time. Futures markets expect interest rates to decline by 1.5%. The Fed has indicated rates will fall by .75%. Either way rates are expected to fall this year. The tough talk of the Fed is needed to convince markets that inflation is the number one enemy, and the Fed is determined to attack it until the Fed target of 2% is reached and they are confident the rate will remain there.
Employment numbers are softening. In the Bay Area there has been a steady drumbeat of layoff notices across the board. Some companies are having 2 rounds of layoffs. These include Salesforce, Facebook, Google even as profits set a record. The Fed was behind the curve in increasing rates, and it is probably behind the ball with lowering rates. Adding caution to the Fed lowering rates was the GDP growth rate in the final quarter of 2023-3.3% unexpected by everyone and part of the rationale for historically high markets. But the job market is changing. Headline from the WSJ recently: Finding a New Job Is Getting Harder
This indicates to me that the employment market is weakening. Additionally, with the increase in layoffs we could have a slowdown ahead.
In the News
You’re not sick anymore—so why are you still coughing? (nationalgeographic.com)
https://www.axios.com/2024/01/31/us-economy-2024-gdp-g7-nations
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