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August 2024 Market Update

In the past week alone, rate cut expectations have changed dramatically due to cooling labor data, uncertain Fed speech, and easing inflation data. Unemployment increased from 4.1% in June to 4.3% in July, a level last seen in October 2021, creating hysteria in both the equity and bond markets. Investors have sharply raised their expectations for a rate cut at the September 18th Fed Meeting. The BLS employment report revealed a drop of 65,000 jobs from June to July, with only 114,000 jobs added, missing forecasts. On August 1st, the market estimated a 22% chance of a 50-basis point cut at the September meeting and a 30% chance of a 100-125 basis point cut. However, after the job and unemployment data were released, these probabilities jumped to 68.5% and 80% on August 2nd, respectively, marking a swift change in sentiment and bets. As of August 6th, the market believes in a 72% chance of a 50-basis point cut in September, while the FOMC members median prediction points to 25-50 basis point cuts by the end of 2024.  The current rate discussion abruptly shifted gear from cuts happening at all to the number of cuts we will see and how quickly they will happen, given the alignment of inflation data with what appears to be a cooling labor market altogether. The Fed’s dual mandate of managing inflation, or “price stability,” while maximizing employment, is a very challenging task, but signs are pointing to a shift in focusing on unemployment and the inherent risks associated with a weaker labor force as greater geopolitical risks present themselves.

Source: CME Group FedWatch

The 10-year treasury yield dropped to a 52-week low of 3.783% on August 5^th as recession fears drove capital into the long end of the risk-free yield curve, elevating 10-Year Treasury pricing and suppressing its yield. This figure represents a 40-basis point decline from a 4.2% 10-Year Treasury just a week earlier. June’s PCE and Core PCE data rose 2.5% and 2.6% year-over-year in June, meeting expectations. Although these figures are still above the Fed’s 2% inflation target, they indicate sustained cooling, with PCE having peaked at 7% in 2022. This positive headway on inflation suggests that higher borrowing costs are effectively curbing spending. Personal income and spending numbers also met expectations, increasing by 0.2% and 0.4%, respectively. The Fed hinted at potential rate cuts in their last meeting, highlighting market uncertainty and moderation in job gains. They also emphasized the need to remain attentive to market risks, marking a shift in their hawkish tone from previous meetings.

Despite what economists, reporters, and headlines tell us, it is challenging to predict whether the recent dip in treasury yields will hold steady or continue to move, as the market often overreacts to data before stabilizing. While the data points suggest progress in controlling inflation, numerous variables make it difficult to forecast the future with certainty. Recent fear-driven equity selloffs have compressed bond yields on the long end of the curve as capital re-evaluated risk and sought safety in longer-term treasuries. Given the current low treasury yields, it may be prudent to transact on CRE now before additional supply enters the market, regardless of anticipated rate cuts.