Markets with Megan

In this episode, Verdence CIO Megan Horneman breaks down last week’s market turbulence following comments from the Federal Reserve and new inflation data. After a period of post-election optimism, reality set in as Fed Chair Jerome Powell highlighted the challenges of persistent inflation and the uncertainty surrounding future interest rate cuts. Key economic indicators, including retail sales and housing costs, suggest a slowing consumer and elevated inflation, which could make the Fed cautious about easing monetary policy. Investors saw interest-rate-sensitive sectors, like small caps, take a hit, reflecting concerns about domestic growth prospects.

Looking ahead, the Fed’s next move hinges on upcoming data, including GDP, employment, and inflation reports. With market expectations adjusting, we predict a 25-basis-point rate cut in December, likely accompanied by a cautious tone. However, the path remains highly uncertain, with any surprises in the data capable of shifting the outlook. Stay tuned for our continued analysis as we track these critical developments. Don’t forget to subscribe to the podcast for updates and share it with anyone looking for deeper insights into the evolving economic landscape.

That election euphoria that we saw right after President Trump's election, with the equity markets, really took a beating last week and we just want to discuss why, what we see going forward and the changes that we saw out of, specifically, the Fed speech last week. So on Friday we got a retail sales number that, on the headline level, didn't look too bad, but when you strip out everything food, energy, trade, all of those volatile items retail sales actually declined for the month. So what we're seeing is that slowing consumer that we have discussed. That is a big risk to the economic growth. But at the same time, because of the fact that the market got ahead of itself, of getting optimistic on what the Fed would do, getting optimistic on inflation Well, we got other inflation data last week that showed some of that progress is stalling and the sticky components like housing services these are still elevated and much more difficult for the Fed to control. So on Friday then we got Fed Powell speak and he said that don't be expected, there is no clear path for interest rates. Some of the actual comments that he made were there's no need to be in a hurry to lower rates. We saw that. He said that they can act cautiously, given these persistent inflation pressures. So this took a lot of that euphoria out of the market. Investors are now getting a little bit more realistic from the interest rate perspective and we have said this that the interest rate cuts that are baked into the market for next year are just too aggressive because of this inflation environment. And we've also warned we've said the Fed with that 50 basis point rate cut in September it was aggressive. It's very easy to reignite inflation.

One of the things some of the other Fed officials said last week was inflation is a very uneven trajectory, down to 2%. So they're going to be very data dependent. They have their meeting in mid-December. Before that we will get another reading on GDP second quarter GDP. We'll also get the PCE, which is the Fed's preferred inflation indicator. We'll get a payroll report and we'll get more inflation on the CPI and PPI. All of these things before the Fed meets in December. So there's a lot of moving parts here.

What we do know is the market did not like this. Last week we saw the 10-year Treasury jump to the highest level since July and we saw all those interest rate sensitive sectors, specifically the small caps that had been the biggest beneficiary, coming out of the election. The small caps are telling you whoa, whoa, maybe the domestic situation is not as good as we had anticipated. The Fed may not be able to be aggressive with rate cuts and now we're looking at a slowing consumer so concerned about the economy side. On that, and from the interest rates and fixed income market, they basically priced out some of these Fed fund rate cuts.

Before last week there was about an 80% chance of a 25 basis point cut in December. Now it's about a 60% chance. Now our view as it stands right now, the Fed is likely going to cut 25 basis points in December, but deliver that with a hawkish tone Now. This can very easily change if any one of these economic indicators come in much better than expected or make it troublesome for the Fed. We'll continue to update you on that, but for now that is our view. That they'll still cut in December Next year is very unknown at this point. So we're kind of going meeting by meeting, just like the Fed is. That's all we have today. If you like this podcast, please subscribe. Share it with friends, family or colleagues. You can hit that alarm bell and if you want any of our historical podcasts, you can go to marketswithmegan dfm. Thank you.