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Brian Pietrangelo:
Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to open doors in the world of investing. Today is Friday, May 3rd, 2024. I'm Brian Pietrangelo, and welcome to the podcast. This week is chock-full of economic data, which we'll cover during the podcast, but this weekend is actually chock-full of activities. Tomorrow we're off to the races for the 150th running of the Kentucky Derby, so fans of racing can certainly enjoy the most exciting two minutes in sports. In addition, we have Cinco de Mayo and we also have the Berkshire Hathaway annual meeting, which is an event unto itself for those fans of investing in Omaha, also on this Saturday. And finally, congratulations to all the graduations and graduates happening this weekend at the high school level as well as the college level, in addition to my very own daughter. So proud of you graduating from college on this Saturday.
With that, I would like to introduce our panel of investing experts. Some might say they are thoroughbreds in the world of investing, here to share their insights on this week's market activity and more. George Mateyo, Chief Investment Officer, Steve Hoedt, Head of Equities, Rajeev Sharma, Head of Fixed Income, and Cindy Honcharenko, Director of Fixed Income. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects and especially our Key Questions article series addressing a relevant topic for investors each week. In addition, if you have any questions or need more information, please reach out to your financial advisor. As we take a look at economic news, releases and market information for the week, there were really two dominant themes and we'll cover both of them during the podcast today. A lot of employment data, which we'll cover here shortly, but also the Federal Reserve meeting ending on Wednesday with the press conference from J. Powell.
On the employment front, we've got a ton of data, including the Employment Cost Index, which came out for the quarter ending March 2024, which showed that wages and salaries were up 4.4% year over year, still showing some levels of elevated inflation on the wage front. The Job Openings report also this week showed 8.5 million job openings in March, which was slightly down from 8.8 in February, again showing some additional facts regarding employers' willingness to post jobs looking for talent. Initial unemployment claims stayed low at 208,000, which has been consistent for about six to eight weeks. And just this morning at 8:30's report from the Bureau of Labor Statistics, we got the new non-farm payrolls, which came in for the month of April at 175,000, which was lower than the month prior, which had been in the 300 level, and was also lower than expectations, which we're looking at about 250,000 new non-farm payrolls added to the economy. 175,000 is still a decent number in addition to the fact that revisions for February and March were actually revised lower by 22,000. So we'll talk to our panel about this.
In addition, the unemployment rate ticked up at 3.9%, not too far off the previous read, as well as what's happening in the overall economy. As I mentioned, also, the dominant news was on the Federal Open Market Committee and J. Powell and the press release for their meeting that they had this particular week. We're going to get a lot of feedback with our panel today. And bringing those two concepts together, both the employment situation and the Fed, we have three questions that we'll navigate with our panel, starting with will inflation have a stronghold on the economy for the remainder of the year? Will the jobs market continue to show resilience during the remainder of the year? And will J. Powell exhibit fierceness in holding interest rates higher for longer? So Cindy, let's start with you. What's your reaction and what's the recap of the Federal Open Market Committee meeting and J. Powell's press conference on Wednesday? Cindy?
Cindy Honcharenko:
So the Fed left all target and administered rates unchanged as expected. The federal funds rate target range remains at five and a quarter to five and half percent. There were no dissents, and this marks the sixth consecutive pause in this tightening cycle. The Fed also reduced the pace of System Open Market Account, or SOMA, runoff caps. Treasury holdings were reduced from 60 billion a month to 25 billion a month. This is a modestly bigger reduction than expected, as consensus was looking for 30 billion a month. Agency and MBS holdings were unchanged at 35 billion a month. As far as the policy statement, that was mostly unchanged, but the Fed did add language that acknowledges the recent lack of progress in getting inflation down to the 2% target. It is still the case that inflation has eased over the past year but remains elevated, and it's also still the case that job gains have remained strong and the unemployment rate has remained low.
However, the committee has added the following to the end of the first paragraph. "In recent months, there's been a lack of further progress toward the committee's 2% inflation objective." This is pretty significant, even though it appears to be a statement of the obvious. In recent public speeches, policymakers have warned that the road to 2% inflation is going to be bumpy and that the recent data was disappointing, but they stopped short of a declaration that progress had stopped. The change is subtle, it falls short of raising alarm on inflation reaccelerating, but it is an incremental step in that direction that most policymakers seemed unwilling to make before this week.
Moving on to the press conference, Powell seemed to twist himself into knots to avoid saying that he was concerned about persistently higher inflation pressure remaining in place. He acknowledged the reality of the first quarter data, but he did not express concern that it was going to continue, aside from just a general sense of uncertainty about the path forward. The press tried very hard to extract some hints about the upside of the Fed's reaction function, but Powell stonewalled them. He at times said that he doesn't deal in likelihoods and flatly refused to entertain hypotheticals. This was the perfect approach for Powell since he does not have the confidence in the specific path forward for policy rates, but it did make for a pretty boring press conference that provided little additional value.
Powell was also asked about the potential risk to stagflation in light of the slowing GDP growth in quarter one and the pickup in wages and inflation. He delivered, I think, one of the better responses of his career as Fed chair, that he doesn't see either the stag or the flation. Perhaps because of this pursuit of reaction function clarity, the balance sheet didn't get too much attention. No one asked any questions about the tapering of QT. Given that the Fed has often described their ideal balance sheet wind down as being similar to watching paint dry, Powell was probably happy to avoid the topic as well.
So bottom line, so far, the Fed's approach to dealing with excessive inflation pressure has been to rely on the higher for longer strategy with interest rates. Nothing from Wednesday's communication suggests that it's going to change anytime soon. In sum, the policy remains data dependent. The data is exceedingly difficult to forecast at the moment, and the Fed lacks confidence to project a path forward for rates. The next summary of economic projections dot plot is going to be very interesting for sure, and I still maintain that I think investors should be patient on adding duration and continue to use the 10 year treasury as a proxy. George, Rajeev, I'd be interested to know your take on the FOMC announcement and press conference this week and, Rajeev, how the bond market reacted.
Rajeev Sharma:
Well, Cindy, as you highlighted, the Fed really didn't have any choice but to keep rates higher for longer. Given the latest string of inflation data that's really pointed towards the stubborn inflation that you mentioned, these readings have not really given the Fed the comfort that they need that inflation is actually reducing to their 2% target. What the Fed said is that they are not ready to cut rates until they see inflation trending towards that 2% target and the expectations of the three rate cuts in the second half of the year were pretty much dashed, I feel, after the FOMC meeting and the press conference. Currently, the projections for rate cuts for 2024 stand closer to one rate cut and the probabilities are really leaning towards that 25 basis point rate cut being sometime later this year.
This has kept upward pressure on the Treasury curve. We did see rates kind of stay pretty elevated after the meeting. However, with the jobs report signaling that employers scaled back hiring in April, we do see Treasury yield start to fall this morning, and this could lead to a recalibration of the number of rate cuts for 2024. Now the markets are pricing in the first rate cut to be in September, it's not a huge probability, it's 56% right now, but it is elevated from what it was before that jobs report came out.
So all in all, this market and the Fed, they remain extremely data dependent and we can see other reasons for rates to remain elevated for longer. You have syndicate desks that are predicting about 30 billion in investment grade new issuance in the upcoming week. Many issuers were trying to avoid the Fed meeting, so they didn't come to market this week. Next week I expect those issuers to come to market. That could put some pressure on rates. We also have Treasury auctions to deal with next week. The US government is planning to sell 125 billion in a combination of threes, tens, and 30-year Treasury notes next week. So investors are going to demand higher yields to participate in these auctions, and you could expect that upward pressure on rates to continue all of next week.
George Mateyo:
Well, from my, I guess, from where I sit, Cindy, to answer your question about the Fed and where we are, I think your phrase that Chair Powell seemed like he was twisted up in knots, I think is an accurate one. And not to be too dismissive, it's a tough job, so I don't want to understate that. But I think he's confused, frankly. I think the Fed is confused about really where things are going. I think they're baffled by a lot of things in this post-pandemic world still. And we often look at models as a way to try and figure out where things are going, and some of the models that people have been using have been broken, frankly, because the overall economy has been stronger for longer, and that's confusing people in many respects.
But that being said, I think it is interesting, Rajeev, to get your take on some of these other issues driving the bond market. We've talked a lot about this year is the fact that things other than the Fed might actually cause interest rates to move around and we're not getting as much volatility in the equity market surprisingly, but you're getting a ton of volatility in the bond market. So I think for investors it's challenging, but I think overall just being patient and really focusing on quality has been the right thing to do and to focus on, despite the fact that the overall numbers and the headline indicators and the key rates and so forth have been really volatile. I'd also point out that the stock market itself is kind of hanging on the bond market a little bit to some extent, and those two have become correlated again, where bonds move up, stocks move up, and vice versa. So I think we have to be mindful of the fact that other things than just traditional stocks and bonds are probably needed in this environment overall.
But I think in the overall message what we got today in terms of the employment situation was probably a bit of good news. I don't think it was a game changer in terms of what the Fed might be thinking, but I do think that it's overall a positive in the sense that we didn't see some moderation there coming into the report, as you mentioned, Rajeev. There were some thoughts around the fact that the Fed might not be doing anything this year because the overall labor market was still pretty tight, the economy was pretty strong, and today we obviously got a few hints that things are moderating. I wouldn't say they're weakening, but they're really moderating, and that suggests maybe the Fed can actually consider taking back a couple of rate hikes they put in last year. So I wouldn't be surprised if the narrative starts talking towards maybe another cut this year. It won't be three necessarily, but we'll see.
And the election, of course, kind of clouds it out for sure, but when you see the overall employment situation still healthy, I think that's a good backdrop for risk assets. But again, stocks and bonds are correlated. So I think beyond that, we want to think about other tools in a portfolio that really can round out some diversification where appropriate. So Steve, I guess in terms of the equity market, we had a couple of key earnings this week. What was your thoughts on that and what'd you read through the earnings releases that came out this week?
Stephen Hoedt:
Yeah, so, George, it's very clear to me that we've got all kinds of crosscurrents right now. When you look at the current performance of the S&P 500 over the last two or three weeks, we've seen a lot of back and forth action, and it seems to us that this is likely to continue at least here for the near term. And there are some good reasons for it. I mean, if you look at the US economy, it's pretty clear from some of the macro data, namely the labor market data that we got this morning, that the economy's running firmer than expected. And when you look at the earnings, you start to go down to some of the idiosyncratic stuff, there are companies that are reporting gangbuster results, and a couple of the large caps that have done so like that are very familiar to our listeners, names like Amazon, or Lilly with the weight loss drugs, that kind of stuff. Those have been doing great.
On the other side, there's macro indicators that are kind of messy, and that's, like you look at earlier this week, the ISM report didn't come in and reaffirm as much strength as people were expecting, and consumer confidence has been weak. And then when you look at some of the other companies that have a window into the consumer, things like Starbucks, McDonald's, DoorDash, you're getting a read that there are people who are still being impacted by inflation, and consumers, at least at certain levels within the economy, are pulling back a little bit. So we've got a lot of puts and takes. It seems like the economy's got a lot of forward momentum. And clearly earnings numbers, if you look at the S&P 500, the earnings numbers for the S&P 500 continue to be revised up into the right, and the momentum there looks really good.
So it's hard to see what gets in the way of the stock market over the intermediate to longer term, but near term, a lot of things can happen. And when you look at what happened last night, we got a little bit of a tailwind today with Apple coming in and talking about, and the number that really struck me, it wasn't anything to do with the financials for the quarter, it was the hundred plus billion dollar stock buyback that they're going to do. I mean, it's the largest buyback in history. Apple now has the five largest that have been announced historically. So clearly the company feels confident enough to step in here and buy its stock.
Now, I could be the cynic and say they're buying their stock because nobody else has been, because it's one of the Mag Seven that's been underperforming year to date, but clearly the company continues to throw off a lot of cash and is willing to step into the market here. So that's given investors a little bit of a boost of confidence today with some of these tech names. So the big one to focus on there though, if we're talking about individual names, is Nvidia, which because of their quarterly reporting cycle, we still got another three weeks to go before we hear from them. So back to you.
George Mateyo:
All right, Steve, interesting take on Apple, although I think Warren Buffett has been buying the stock a lot too, hasn't he?
Stephen Hoedt:
He has, he has.
George Mateyo:
Well, good to note, and maybe I'll just kind of turn the table for a second, though. I think, Brian, you're the one who always asks us the questions, but you've been on the road a lot these past few weeks and I'd be kind curious to get your take on what you're hearing from clients?
Brian Pietrangelo:
Yeah, George, thanks. I've got the privilege to visit a lot of markets across our country within the footprint of KeyBank. And last month I had a number of client events in Cleveland. We had two events there, and this week I was in southwestern Ohio with Cincinnati and Dayton markets. And what makes me smile, George, is that the content that we curate on these podcasts for our listeners is extremely consistent with the feedback that I'm getting in the live events when I'm meeting with clients. For example, the top three topics that I got asked in terms of questions that were on the minds of our clients and prospects were what's happening with interest rates?
And so we frequently talk about that, not only because it's important, Fed policy is important, but when you have individuals, and more importantly than that, we have a lot of business owners that are clients and they're really thinking about very carefully what are their one and three and five-year business plans when they're thinking about deploying capital, and interest rates become a very important component of that. So to be able to provide updated information on that topic is really important and valuable to them.
Second, they always want to know what the state of the economy is and what we think is happening. That's why we talk about it, including just today and just now. Where's the direction heading? What's happening with earnings, with jobs? So again, very consistent with the topics that we're talking about here. And then third, which is a little bit different, we have touched on it somewhat, but I get asked what's going to happen with the elections this year? And so interestingly enough, look forward to probably the third quarter of this year, we're probably going to have a Wealth Institute call with George and others hosting in terms of talking what our topics are on the election and how it may or may not affect the markets and the economy. Look for that probably in the third quarter of the year. So that's what I'm hearing when I'm on the road, George.
George Mateyo:
All right, Brian, thanks very much and safe travels home.
Brian Pietrangelo:
Thank you. Well, thanks for the conversation today, George, Steve Rajeev and Cindy. We appreciate your perspectives as always. And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results, and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or financial advisor for more information, and we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you navigate your financial journey.
Speaker 6:
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