The week in review
- Headline CPI rose 0.2% m/m and 2.9% y/y
- PPI rose by a softer than expected 0.1% m/m
- Retail sales rose 1.0% m/m, beating expectations
- Initial claims fell 17K to 227K
The week ahead
- FOMC Minutes
- Jackson Hole
- PMIs
- New home sales
Thought of the Week
Recent data have sent mixed signals about the U.S. economy, causing interest rate expectations to fluctuate once again. Just two weeks ago, a weak jobs report sparked recession fears, and markets swiftly priced in an additional rate cut for this year. Since then, strong retail sales and low initial jobless claims readings helped alleviate these fears, and markets are now back to pricing in only three cuts in 2024. However, while short-term rate expectations dominate headlines, it is long-term rates that matter most to long-term investors.
This week’s chart explores both market and Fed expectations of the longer-term, or “neutral,” federal funds rate. As of the most recent Summary of Economic Projections, the Fed’s “dot plot” projects that the overnight rate will be 3.1% by the end of 2026, and not lower than 2.8% over the long run. Moreover, this number was revised higher, first in March and again in June, signifying that the Fed thinks the economy can tolerate higher interest rates. This suggests that, barring any sort of economic collapse, the era of “free money” is likely over, and a more “normal” interest rate environment, where real yields are positive, is upon us.
Given this backdrop, investors may have to reconsider how they allocate capital. Higher bond yields could help investors achieve their income goals with less risk, while equity market quality will be more of a focus as companies combat higher borrowing costs.
Past performance is not indicative of future results
Chart of the Week: Bloomberg, CME Group, Federal Reserve, J.P. Morgan Asset Management. Market expectations reflect the federal funds rate futures curve as of 8/15/2024.
Thought of the week: Bloomberg, CME Group, Federal Reserve, J.P. Morgan Asset Management. Market expectations reflect the federal funds rate futures curve as of 8/15/2024.
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Originally Posted August 19, 2024 – Weekly Market Recap
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Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors.
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