This week was the first time in recent memory that Fedspeak felt more dominant than macroeconomic data.
Maybe that's just because my memory is still fresh from Friday, which was supposed to be dominated by The Big Jobs Report, only to be overshadowed by comments from Fed Governor Christopher Waller. The key line in his mid-morning speech came in the final paragraph: "I am open-minded about the size and pace of [rate] cuts," he said. "I was a big advocate of front-loading hikes when inflation accelerated in 2022, and I will be an advocate of front-loading rate cuts if that is appropriate."
Cue a huge reaction. The two-year Treasury yield, as our Steve Liesman explained, captured the drama yesterday. When his "front-loading" remarks hit the tape, the two-year yield plunged to 3.62%, before recovering somewhat. Its yield was above 5% as recently as April!
If we consider this a proxy for near-ish term interest rates, it suggests they're about to fall substantially.
And while the odds of a half-point rate cut on September 18th are growing, plenty of investors are still skeptical it will make much difference when rates are so high to begin with--at nearly 5.5%. I would just tell them: watch the two-year. It suggests a lot more than a couple of small rate cuts are coming.
And that will have much bigger implications. We can only hope, for starters, that it doesn't mean the economy will be in recession within that two-year timeframe. It will have a major bearing on whether people who were parked in cash to earn 5% will be willing to sit there and eventually only earn 3.5% or so. Bank investors seem cautious; both the large and regional bank ETFs have been selling off in recent weeks, and the regional banks are now up less than 5% on the year.
I should add: this was also the first week in recent memory that the Beige Book made a big impact. The Fed's anecdotal survey of its 12 regional banks had some very downbeat remarks about the economy. Most of the districts actually reported "flat or declining activity," in sharp contrast to the growth in GDP and consumer spending we've actually seen in the headline numbers.
So this was decidedly not the week that investors needed Broadcom to fail to raise its earnings guidance, which happened on Thursday night, triggering a 10% selloff in the shares on Friday and a 2.5% drop in the Nasdaq. All told, it was the Nasdaq's worst week in two years. Broadcom's weakness also led Nvidia to drop another 4%, with that bellwether and widely held name now down more than 30% from its June highs. (Although Stephanie Link told us she's still a buyer of Broadcom and that AI was not the reason for its weakness.)
"Is the soft landing still in play?" My neighbor asked me last night. To which I said: I think so? We've blown past the hard landing I expected last year, and if Dean Maki (now at Point72) says we can still keep chugging along here, then I believe him.
"We believe...robust real income growth and very high wealth levels should be leading to robust growth in real consumer spending, and that is happening," Maki wrote in a client note last week. He only expects a quarter-point cut from the Fed. We do get retail sales this week, which may be soft, but they were better than expected in July, and new jobless claims remain at historically low levels.
If anything, a still-growing economy, a series of eventual rate cuts, and a market that can digest a major correction of the AI narrative (cough cough, bubble) is a setup that could actually leave us better off going into year-end. One can hope!
Have a great weekend, and see you on Monday...
Kelly
