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WEEK AHEAD
September 23-27, 2024
Another week of market gains and economic strength continues to affirm our indicators to maintain a fully invested position.
The Fed didn't disappoint, delivering a firecracker 50 basis point rate cut—the first since its monetary policy glide path meandered from "transitory" inflation to "restrictive" territory and now, the euphemistic "recalibration." The move lit up the markets, pushing the S&P 500 to a weekly gain of 1.39%, bumping its year-to-date performance to a stellar 20.78%. Yet, the real drama unfolded in the bond market. While the Fed's rate cut would traditionally push bond yields lower, the 10-year Treasury yield climbed 7 basis points to 3.73%, dragging bonds down 0.22%. It was a sign of a subtle shift—the yield curve, which had been largely inverted for much of 2024, began to align more naturally, hinting at a return to an upward-sloping curve. Instead of slashing rates to avert a hard landing, the Fed is guiding interest rates to "help maintain the strength of the economy" – consistent with Sowell's current strategic position.
Equities reveled in the news, with economically sensitive sectors leading the charge. Energy soared 3.97%, Communication Services climbed 3.77%, and Financials rose 2.56%, reflecting a renewed optimism in growth. On the data front, the economy's resilience was underscored by higher-than-expected readings: Retail Sales inched up 0.1%, Industrial Production jumped 0.8%, and Housing Starts surged 9.6%—a healthy cocktail of indicators suggesting that the Fed's cut was more about tuning the engine than averting a breakdown.
As the FOMC wraps up its September act, all eyes are on the next two meetings, with whispers of another rate cut looming large. In the week ahead, investors will be keeping a close watch on Durable Goods Orders, GDP, and Personal Spending to gauge the strength of the economy. On the earnings front, Costco, KB Home, and Micron Technology are slated to provide fresh insight into market momentum.
"As inflation has declined and the labor market has cooled, the upside risks to inflation have diminished and the downside risks to employment have increased. We now see the risks to achieving our employment and inflation goals as roughly in balance, and we are attentive to the risks to both sides of our dual mandate." - Chair Powell's FOMC Press Conference, September 18, 2024
Risk of China Deflation: Traders eyeing China Inflation
Moving from questions of rates and inflation in developed markets, we decided to look at prices in China in search of clarity on the direction of the world's second-largest economy by GDP. Whereas rising prices have been a big problem for Western central banks, investors follow CPI in China, hoping for a rise. That's because upward pressures on prices could indicate recently weak sentiment and sluggish activity on the part of consumers might be turning a corner, pointing to a return to growth and a rebound in its stock market, down almost 8% YTD as of last Friday.
Prices point to weak economy
Last Monday, consumer inflation sent just such a signal when China's National Bureau of Statistics reported that August CPI tallied a 0.6% year-over-year increase. Despite falling short of economists' estimate of 0.7%, it improved over July's 0.5% year-over-year rise and the most annual progress witnessed since February. Unfortunately, producer prices released showed a 1.8% slide in PPI year-over-year, far worse than the 1.4% consensus estimate, not to mention the 0.8% drop one month prior (see below).
In fact, even the seemingly decent headline CPI was something of an illusion, as food prices jumped 2.8% year-over-year in August due to heat and rain. Core CPI fell from 0.4% in July to 0.3% in August, marking its lowest since March 2021.
Trade points to soft demand
Taken together, such data points to extremely weak consumer activity and excess production capacity. That's consistent with the type of stimulus China has seen over recent years, which is focused more on boosting manufacturing with little support for consumption. Trade data released by China's Customs agency indicated the same trend: exports rallied 8.7% year-over-year. In comparison, imports grew just 0.5%, short of the 2% economists expected and miles off last month's 7.2% increase.
Demand stimulus seems a must
Strong exports may serve to distract from China's languishing domestic economy. In fact, exports are probably exaggerated due to front-loading of shipments by producers trying to get ahead of escalations in trade tensions. A soft landing for the global economy would likely keep outbound trade going strong, which helps to support sagging growth. However, we believe policymakers will need to make greater efforts to stimulate demand—programs encouraging consumer trade-ins, for example—before real progress can be made in turning China's economy around.
Disclosure: Reprinted and revised with permission from Rayliant Investment Research in partnership with Affinity Investment Advisors. The following article was originally published on September 16, 2024.
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.