Colin’s Note: Don’t expect the Fed to cut interest rates anytime soon…
Chairman Jay Powell cited stubborn, unbudging inflation as the reason behind keeping rates high. Until it has “greater confidence” in the progress toward its 2% goal, the Fed isn’t budging on rates.
That’s despite all the red flags the economy has been throwing… warning signs that would have, once upon a time, had the Federal Reserve taking a more accommodating stance.
So what’s going on?
Let’s get into it. It’s all in today’s video. Just click below to watch. And, as always, you can reach me and my team at [email protected].
Bleeding Edge subscribers, happy Friday.
If there was any hope left that the Federal Reserve would cut interest rates this year, those hopes were dashed this week.
On Wednesday, Fed Chairman Jerome Powell – as he often does – successfully straddled the line between being too hawkish or too dovish.
This is despite how parts of the economy are deteriorating in plain sight. Job cuts for the first half of 2024 hit their highest since 2009. That’s right, 2009. For those of you who don’t remember, early 2009 was peak Great Financial Crisis fear.
Today we got news the economy added far fewer jobs than expected. Nonfarm payrolls came in at a 175,000 increase. The expectation was 243,000. Meanwhile, the unemployment rate ticked up to 3.9%.
But it’s not just the job market flashing warning signs these days. Starbucks, the global coffee chain, slashed its revenue growth outlook from 7% to 10% to roughly flat for the remainder of the year. The coffee giant said consumers have tightened their wallets here in the United States. Shares of Starbucks fell to a new two-year low on that news.
But the pullback in spending by the consumer isn’t just isolated to the $5 cup of coffee crowd. McDonald’s also reported earnings this week, saying, “Consumers continue to be even more discriminating with every single dollar that they spend.” The fast food giant said traffic in the United States was flat to declining in the first quarter.
In the past, this would’ve been enough to cause the Federal Reserve to shift from a tight monetary policy to a far more accommodating one… but not this time.
Yes, the inflation rate is still just slightly above the Federal Reserve’s arbitrarily selected 2% target. But the Fed’s mandate is not just to control inflation. It’s for full employment, as well. And despite all the concerning data that we’re seeing from the labor market, the Federal Reserve is not going to budge.
And that’s because the stock market continues to power higher.
Apple reported their earnings yesterday and reflected exactly what we’re seeing at Starbucks and McDonald’s. Apple’s device sales over the past year were down 9.5%. It’s one of the largest drops we’ve ever seen at Apple, so you would’ve expected the stock to decline.
But in fact, it was the opposite.
Apple shares skyrocketed on the backs of a plan to spend $110 billion to buy back shares over the next couple of years. That was enough to send shares of Apple soaring up more than 6%. And given Apple is one of the largest holdings among most index funds… it was enough to send the entire market higher.
So what does all this mean?
First, we’ve seen a complete separation of the real economy from the stock market.
Consumers are passing on indulging in Starbucks and McDonald’s.
Even though the iPhone price is largely subsidized by payment plans and trading deals, consumers aren’t buying the company’s latest products at the same pace as before. That’s because when you look at the labor market, people are having a harder and harder time finding and keeping a job.
And all of this falls under the weight that prices for just about everything remain elevated and have largely canceled out any wage increases we’ve seen over the past couple of years.
But don’t expect the Federal Reserve to race to the rescue anytime soon.
The stock market is the economy they pay attention to the most. If the stock market was hitting rock bottom like it was in 2009, the Federal Reserve would be like a pack of doves raining money down and lowering interest rates. But that’s not going to happen this time.
The economy that the Fed pays attention to can mask all of its problems and weaknesses with a $110 billion share buyback.
Ultimately, the Fed will be late to react once again.
Recall when inflation was clearly out of control towards the end of the pandemic. they were calling these price increases “transitory.” Only months later did they finally act, well after the stock market took a tumble from its all-time highs.
The same is going to happen this time. Despite all the evidence of a weakening economy, the Fed will be late to act because companies like Apple can financially engineer a positive stock price despite dismal sales and demand.
As an investor, I’d stay fully invested because there’s no way to judge how long Wall Street can keep rearranging the deck chairs. But at some point, this ship is going to sink. Then, and only then, will the Federal Reserve Act. And for many in the real economy, it will be too late.
That was The Bleeding Edge for today. Have a great weekend. I’ll see you again next week.