Welcome to September, historically the worst month of the year for two fundamental reasons. First, retail credit lines are fully extended ahead of the holiday season this elevating the stress within the financial system. This seasonal factor has waned in recent years however it is still an issue.
Perhaps more significant, September is typically the month when it is completely acknowledged that early year profit, economic or monetary forecasts/assumptions may not materialize.
Speaking of which, will the Federal Reserve lower rates in September? For the financial markets, an interest rate reduction really does not matter at this juncture given that credit spreads have collapsed to around a 40 year low thus suggesting little fear or concern.
Psychologically an interest rate reduction might be of considerable significance given that over 90% of equity trading is done algorithmically utilizing seven-word headlines and momentum. An argument can be made that equity volatility could rise sharply if the Fed does not lower rates given the incredible attention focused on such.
Commenting on Friday’s release of the PCE or the primary inflationary indicator utilized by the Fed, the data came in line as expected, rising by 0.3% from June and up 2.9% for the year, the most since February.
The good news is that the data was in line with expectations, thus keeping the status quo intact which leaves a Fed cut in play for September. The bad news is inflation is continuing to inch higher, which is not really the environment the Fed likely wants to cut in.
Short of a blow-out jobs report on Friday, it is difficult to see any data derailing the Fed’s plan to cut rates in several weeks.
Speaking of data, the economic calendar is comprised of numerous top tier indicators including the ISMs, the JOLTS Jobs Openings statistics, factory orders, trade gap, ADP Private Sector Employment Survey and the BLS Employment report.
Last night the foreign markets were down. London was down 0.52%, Paris down 0.15% and Frankfurt down 1.43%. China was down 0.45%, Japan up 0.29% and Hang Seng down 0.47%.
Dow and NASDAQ futures are down 0.5% and 1.0%, respectively on tariff uncertainty and FOMC interference. The 10-year is 13/32 as the British 10-year yield hit its highest level since 1998 amid a record bond auction.
