Pandemic Era Stimulus Withdrawal Timetable Matters More Than Fed's Rate Policy and Projections

Alexander Garcia
18 Sep, 2024
Miami

Stock market indexes traded in a tight range, and the yield on 10-year Treasury notes edged higher ahead of the Fed's rate decisions later this afternoon. 

The S&P 500 index and the Nasdaq Composite rebounded from morning weakness as investors awaited the Fed's monetary policy decisions and economic projections at the end of its 2-day meeting. 

The Federal Reserve is set to announce its decisions at 2:00 p.m. ET, and investors are widely anticipating a rate cut of at least 25 basis points. 

Despite the widespread enthusiasm for a possible rate cut, inflation is still strong and deeply entrenched in the economy. 

Moreover, the Fed's eleven rate cuts over the last two years have moderated the inflation, thanks largely to the decline in crude oil prices. 

Overall inflation is largely driven by the increases in prices in fuel, goods, services, and housing. 

The Fed's rate-increase campaign has failed to stop the ongoing rise in home prices and elevated service inflation. 

The overall inflation has moderated largely because of the decline in prices of crude oil, and more production has shifted to Asia to take advantage of cheaper labor and operating costs. 

The Fed's rate hikes have little influence on the goods and fuel economy, which are largely driven by demand and supply forces and technological advances. 

The U.S. inflation is likely to stay elevated because of the surge in money supply by the Federal Reserve during the pandemic era, and policymakers are still reluctant to withdraw the outsized stimulus.

About 63% of families own their homes, buffeting these families from the home price inflation over the last five years. 

For now, inflation experienced by home owners is generally lower than by home renters because many owners are still carrying mortgage loans with interest rates of less than 3%, far lower than the current rate above 5%. 

In fact, most home owners are beneficiaries of the housing price inflation and continue to consume at a near or above pre-pandemic level, taking advantage of the wealth effect. 

Lowering the interest rate is only going to feed into housing price inflation and drive demand for goods and services higher, which would further stoke inflationary forces. 

Meanwhile, the Federal Reserve has made little progress in withdrawing the excess stimulus injected into the economy, which is forcing investors to increase exposure to riskier assets. 

 

U.S. Housing Starts and Completions Rebounded In August 

Housing starts and completions in August rebounded sharply, according to the latest data released by the U.S. Census Bureau. 

Seasonally adjusted housing starts rose 9.6% from the previous month to an annual rate of 1.356 million, and July starts were revised higher to 1.236 million.

Housing starts rose 3.9% from a year ago, driven by the increase in the South and in the West. 

Seasonally adjusted building permits increased 4.9% from the previous month to 1.475 million, and July permits were revised to 1.406 million. 

On an annual basis, building permits decreased 6.5% from an annual rate of 1.578 million in the month a year ago. 

Housing completions in August rose 9.2% from the previous month to 1.788 million, and July completions were revised to 1.637 million. 

On an annual basis, housing completions surged 30.2% from an annual rate of 1.373 million in the month a year ago. 

 

U.S. Indexes and Treasury Yields

The S&P 500 index decreased 0.1% to 5,627.87, the Nasdaq Composite rose 0.2% to 17,598.43, and the Russell 2000 index fell 0.3% to 2,199.19. 

The yield on 2-year Treasury notes edged higher to 3.64%, 10-year Treasury notes inched up to 3.68%, and 30-year Treasury bonds inched lower to 3.99%.

WTI crude oil decreased $0.65 to $70.54 a barrel, and natural gas prices edged up 4 cents to $2.36 a thermal unit.

Gold fell by $0.79 to $2,574.91 an ounce, and silver increased by $0.11 to $30.59.

The dollar index, which weighs the US currency against a basket of foreign currencies, edged higher to 100.85.

 

U.S. Stock Movers

Casella Waste Systems declined 4.5% to $101.50 after the recycling company announced its plans to raise $400 million in an equity offering of Class A common stock. 

General Mills declined 0.8% to $73.90 after the food product maker reported that higher input costs negatively impacted its margins. 

Net revenue in the fiscal first quarter ending on August 25 decreased 1% to $4.8 billion from $4.9 billion, net income dropped 14% to $579.9 million from $673.5 million, and diluted earnings per share fell 10% to $1.03 from $1.14 a year ago.

The company reaffirmed its fiscal year estimates and said adjusted diluted earnings per share are expected to range between a decrease of 2% and flat in constant currency. 

Intuitive Machines soared 47% to $7.91 after the company was awarded a contract by NASA that could be worth up to $4.8 billion. 

 

European Markets Lacked Direction, UK Inflation Held Steady at 2.2% 

European markets traded in a tight range as investors reviewed the latest inflation updates and awaited monetary policy decisions in the U.S., the U.K., Norway, and Japan. 

Benchmark indexes in Paris, London, and Frankfurt hovered around the flatline with a downward bias, and investors debated the growth outlook in the currency union amid weak consumer sentiment. 

The Euro Area inflation was confirmed at 2.2% in August, lower than 2.6% in July, Eurostat confirmed in a report released on Wednesday. 

In addition, the U.K. consumer price inflation held steady at 2.2% in August, matching the rate in the previous month, the Office for National Statistics announced on Wednesday. 

However, service inflation accelerated to 5.6% from 5.2% in the previous month, driven in part by a surge in airfares. 

On a monthly basis, consumer price inflation rose 0.3% following a decline of 0.2% in the previous month. 

The Federal Reserve is scheduled to announce its rate decisions and economic projections later in the day, and investors are hoping that the central bank will announce its first rate of at least 25 basis points in over four years. 

The Bank of England and the Norges Bank are set to hold rates stead at the end of their policy meetings on Thursday. 

 

Europe Indexes and Yields

The DAX index decreased by 0.1% to 18,720.15; the CAC-40 index fell by 0.6% to 7,444.90; and the FTSE 100 index declined by 0.8% to 8,253.68. 

The yield on 10-year German bonds edged lower to 2.16%, French bonds inched lower to 2.89%, the UK gilts edged up to 3.84%, and Italian bonds increased to 3.54%.

The euro edged up to $1.11; the British pound inched higher to $1.32; and the U.S. dollar weakened to 84.30 Swiss cents.

Brent crude decreased $0.52 to $73.23 a barrel, and the Dutch TTF natural gas rose by €0.10 to €35.68 per MWh. 

 

Europe Stock Movers

Davide Campari Milano NV declined 5.3% to €7.16 after the Italian spirit maker's chief executive, Matteo Fantacchiotti, resigned after being in the office only five months. 

Reckitt Benckiser increased 1.3% to 4,671.0 after media reports suggested that the company is looking to sell its homecare business. 

Legal & General Group decreased 2.5% to 222.70 pence, and the UK-based financial services company agreed to sell home builder Cala Group for £1.35 billion. 

Nordex SE gained 1.9% to €15.18, and the German wind turbine maker said it won an order for 10 turbines from the wind and solar park developer Umweltgerechte Kraftanlagen GmbH & Co. KG. 

The company did not disclose the size of the order. 

Ubisoft Entertainment advanced 5.3% to €12.54 after BMO Capital Markets raised its rating on the stock to "outperform" from "market perform."

The brokerage firm said that the company is trading at a cheap valuation of 2.7 times its operating earnings, compared to a 10-year average multiple of 10.5. 

The company is also on track to complete its Є200 million cost savings, of which Є150 million has already been achieved. 

BMO lowered its price target to Є22 from Є27, and despite the tart price adjustment, the brokerage firm said that the stock is still trading at a substantial discount to its historic average. 

 

Tokyo Stocks Lose Early Momentum, Japan's Trade Deficit Shrank In August 

Benchmark indexes in Tokyo lacked direction and lost early morning momentum after Japan's exports and import growth fell short of market expectations. 

The Nikkei 225 average edged up a fraction, and the wider Topix index traded around the flatline amid weak market sentiment. 

The yen traded at 141.55 against the U.S. dollar in Tokyo as investors awaited the rate decisions from the U.S. Federal Reserve later in the day. 

Japan's exports in August increased 5.6% to 8.4 trillion yen, or $59.2 billion, and slowed sharply from a 10.2% increase in the previous month, the Ministry of Finance reported Wednesday. 

The exports struggled to increase after several automakers shut down manufacturing plants ahead of the typhoon, denting overall exports because of weather-related issues. 

Exports to the U.S. decreased for the first time in three years after the shipment of automobiles, pharmaceuticals, and construction machinery struggled to advance. 

However, shipment of semiconductor equipment soared 40% from a year ago. 

Shipments to Europe fell 8.1%, but exports to mainland China, Hong Kong, and Taiwan increased 5.2%, 27.3%, and 21.6%, respectively. 

Exports to India soared 26.6% and to Russia advanced 17.9%. 

Japan's imports in August increased 2.3% to 9.1 trillion yen, widening its trade deficit to 695.3 billion yen, or $4.9 billion. 

Japan recorded a trade deficit for the second month in a row, but the overall deficit shrank 26% from a year ago, supported by the rise in shipment of chip-making equipment, electronic components, and semiconductors. 

In other economic news, Japan's core machinery orders, which exclude volatile and large-ticket ships and electric power plants, decreased 0.1% from the previous month in July to 874.9 billion yen. 

On an annual basis, private sector core orders increased 8.7% after falling 1.7% in June, according to a report released by the Cabinet Office on Wednesday. 

 

Japan Stock Movers 

The Nikkei 225 Stock Average increased 0.2% to 36,287.98, and the Topix index decreased 0.1% to 2,553.98. 

Tech stocks were volatile after market indexes lost early gains and turned negative. 

Tokyo Electron increased 0.1% to¥22,465.0, Advantest Corp. gained 1.1% to ¥6,125.0, and Screen Holdings added 1.8% to ¥9,746.0. 

Retailers traded mixed after the yen hovered near its 2024 high. 

Seven & I decreased 0.3% to ¥2,151.50, Fast Retailing increased 1.4% to ¥44,820.0, and Isetan Mitsukoshi fell 3.2% to ¥2,125.0. 

Financial services providers edged  higher ahead of the Bank of Japan's rate decisions on Friday. 

Mitsubishi UFJ Financial decreased 0.1% to ¥1,417.50, Sumitomo Mitsui Financial gained 0.5% to ¥8,795.0, and Mizuho Financial increased 0.6% to ¥2,764.50. 

 

China Indexes Hover at Five-Year Low After Investors Return from Mid-Autumn Holidays 

Stocks in Shanghai and Shenzhen struggled to regain their footings after investors returned from a 4-day weekend. 

Market sentiment was cautious ahead of the Federal Reserve's monetary policy decisions later in the day, and investors are hoping that the central bank will deliver a widely expected rate cut of at least 25 basis points. 

China's investors reassessed the latest batch of mixed economic data released over the weekend. 

Retail sales, fixed investment, and industrial output fell short of market expectations, and the property market deepened as prices for new and existing home sales declined in August. 

Moreover, investors are worried that the elevated urban jobless rate will contribute to consumer confidence weakness in the months ahead. 

The CSI 300 index tested the lows reached in January 2019, as investor confidence remained weak after the latest economic data signaled weak earnings growth in the second half. 

Stock market indexes are likely to test the lows reached in February 2016, as investors stay on the sidelines amid weakening consumer confidence and sharply decelerating earnings growth. 

 

China Stock Movers 

Mainland-focused CSI 300 index added 0.2% to 3,164.82 and traded near a five-year low, and financial markets in Hong Kong are closed for a holiday. 

The rebound in crude oil prices lifted stocks of energy producers and coal miners. 

Shaanxi Coal Industry increased 2.7% to ¥22.87, CNOOC added 0.2% to ¥26.24, and PetroChina added 0.4% to ¥7.94. 

Consumer-focused stocks struggled to advance in Wednesday's trading. 

Midea Group added 2.3% to ¥64.97, Kweichow Moutai dropped 2.4% to ¥1,272.01, and Wens Foodstuff Group fell 3.1% to ¥15.28.