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September 2024 Market Update

August brought another wave of market uncertainty, particularly concerning sustained inflation projections. The cooling of PCE and Core PCE in June, along with dovish remarks from the Fed, initially drove yields down, only for them to rebound later. July’s PCE data, which came in meeting expectations at 0.2% month-over-month, was a positive sign. However, strong consumer spending, which exceeded expectations by 0.3% MoM, and was 0.2% higher than June’s figures, is casting doubt on the market’s confidence in sustained lower inflation despite favorable data. When annualizing the last three months of PCE, the outlook appears brighter, suggesting the Fed should prioritize employment stability, as they have recently indicated. Data contradictions and geopolitical uncertainties will continue to influence market fluctuations, however, and participants should consider applying a higher risk rating in today’s environment, keeping yields higher than we would all like to see. Adding to the prediction confusion, the BLS revised non-farm job growth down by 818,000 in late August, following their original March 2024 YTD report, marking a staggering 30% downward revision, the largest since 2009. Despite this, non-farm payroll jobs still grew by 174,000. It’s no wonder the market is struggling to trust these economic indicators. Nonetheless, consecutive cooling in the Fed’s leading economic indicator (PCE) and a supposedly cooling labor market should provide further momentum for the anticipated rate cuts we are all hoping for. The last time we maintained such a high real interest rate was in 2008-2009, when real rates reached as high as 2.5%, and we all remember what happened then. Real interest rates are calculated by subtracting inflation from the nominal interest rates on risk free treasuries. When real rates are too high for too long, mechanics in economies tend to break. History usually doesn’t repeat, but it rhymes, and we should believe that this timed is no different.

Despite potential continued volatility in treasury yields, we must remember the origins of the debt in this credit cycle. Most of our elevated debt balances are at the federal level and consist of money owed to ourselves, not isolated to the private sector. However, we are not immune to concentrated pockets of inflated values and asset-specific losses as global and domestic dynamics continue to unfold. Anything can happen.

After the 10-year Treasury hit a 52-week low of 3.783% on August 5th, it now stands at 3.9%. Time will tell whether we break and hold above 4% or hit another 52-week low. Buckle up.