The Fed is likely to have a short and ‘shallow’ rate cut cycle

All three major US indices (^DJI, ^IXIC, ^GSPC) closed the shortened trading week with overall gains, and the S&P 500 and Nasdaq Composite both set new record highs. State Street Global Markets multi-asset macro strategist Cayla Seder joins Market Domination after hours to discuss the state of the market after June’s jobs report marked the latest sign of economic cooling.

“We have this kind of moderation going on … but the current level is still quite strong. And so I think what that means is that as we’re evaluating this data, we have to put some of this moderation into context. And so, yes, you have a title figure in NFP [nonfarm payroll] press today that was still above pre-Covid rates. But then you see some signs of weakness underneath,” Seder tells Yahoo Finance

“However, if we take a step back, wage growth is still quite strong [Job Openings and Labor Turnover Survey] The data means there are more jobs…than unemployed people,” Seder explains. When analyzed from that perspective, she believes that while an interest rate cut is in play for September from the Federal Reserve, “so far , it appears the economy is still probably too strong to expect a slowdown in the near term.”

She notes that “the market has this habit of jumping ahead” when economic data is released:

“I would caution people not to get too excited about some signs of moderation and interpret it as weakness and expect a lot of cuts. Unless we really start prices in a recession, which so far seems unlikely, it’s going to be difficult for the Fed to really deliver this large size of cuts and so it’s much more likely, I think, that we’ll see a shorter and relatively shallow cut cycle.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination overtime.

This post was written by Melanie Riehl

Video Transcript

Okay, let’s take a different perspective here, because joining us to help us break down this four-day trading week, which includes several new record highs, is Kayla Cedar State Street, Global Markets, Macro Multi Asset Strategist, Kayla, it’s good to see you

It seemed like Kayla, um what you’re suggesting is when you looked at the big jobs report today in other economic data that you’ve looked at, you seem to be saying, Kayla, you’ve seen the economy that OK, it’s cooling, it’s moderating , but it is still in your opinion, it seems quite elastic and relatively elastic and strong here.

Yes.

Thank you so much for having me.

You know, I think that’s or that’s definitely right.

We have this kind of moderation that’s going in this direction towards moderation, but the current level is still pretty strong.

And so, you know, I think what that means is that as we’re evaluating this data, we have to put some of this moderation into context.

And so yes, you have a headline figure in the NFP print today that was still above pre-Covid rates, but then you see some signs of weakness below.

However, if we take a step back, wage growth is still quite strong.

Jolt’s data means that, you know, there are more jobs than there are unemployed people.

And so when you turn that into monetary policy, yes, that means September is alive.

But so far, it appears that the economy is still probably too strong to expect a cut in the near term.So you think it’s a very strong period?

And we could see a risk of re-acceleration, which means that maybe the Fed is on hold much longer than people thought or even thought it should raise rates.That seemed to be a possibility a few months ago.But no doubt, its price has come down a lot since then.

Yeah, you know, I think the price has come down because the data is starting to move in the direction of easing and moderating.

So that means the bar for a raise is higher than the bar for a cut.However, with that said, I think you point out a really important factor to consider is that the federations are, they don’t want to cut and then have to grow again.

And so I think that’s why when we look at the fundamentals, especially in the CP I prints, we want to start seeing services and housing make progress toward 2%.Uh because otherwise there is a risk of re-acceleration, Kayla shows another big economic data next week.CPIW, what are you looking for there, Kayla, what is yours, what is your expectation?

Yes.You know, one thing that we know about at State Street is that we have price statistics, which is a daily measure of commodity inflation.And so when we look at the progress made on commodity inflation so far, that’s really what’s driven a lot of this disinflationary movement down.And so I think that means two things, one, we need to start seeing more progress on the services and housing side.

And we also can’t see commodities re-accelerating.And so what we’re seeing so far is that commodity inflation is continuing to move lower.We are constantly seeing this inflation.And so that’s a good sign going into next week.But again, we should also really start to see uh those o numbers start to come down and we’re also going to look for a continuation lower in uh super core as well.

What are the big macro headlines that you might be a little worried about?

Uh not necessarily front and center now.

It could be geopolitics, it could be elections, things that could cause some concern in the market uh in the coming months.

You know, I think the market has this habit of moving forward.

And that’s what makes this transmission or um I would say this movement in some of the data is difficult to deal with because we see weakening, but is it weakness?

And so, I would caution people not to get too excited about some signs of moderation and interpret it as weakness and expect a lot of cuts unless we actually start prices in a recession, which so far it seems impossible.

Um It will be difficult for the Fed to actually deliver this rr um with this large size of cuts.

And so it is much more likely.

I think we will see a shorter and relatively shallow crop cycle.

So Kayla added for us, given your view on the economy and investors listening right now in the stock market, Kayla, what do you prefer?

Yes, I really still prefer high quality growth, which still means tech as we head into earnings season, which starts next week.

It really looks like technology is where most of the revenue growth will be as we look forward to the rest of the year.

Expectations are that earnings will continue to accelerate, but earnings will slow slightly.

And so when we think about eight, what does that mean for sector allocation?

That’s really a good story for tech because what it means is that they can still support profit margins without some of that revenue growth, given their borrowing costs, given their cash flows, things like that.

And so they are very well, strengthened to navigate that kind of environment.

Okay, you should leave it there, but appreciate your knowledge here on this quiet Friday afternoon.