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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, April 5th, 2024. I'm Brian Pietrangelo and welcome to the podcast. As you may have noticed, we were off last week to celebrate Good Friday. So today we will resume our regularly scheduled programming. And coming up this weekend slash into Monday, we're going to experience this eclipse, which will span a significant number of states, and oddly enough, it will go right through many of our major states where we have a footprint and employees and clients and actually centered right around Cleveland, Ohio. So we're going to be looking out for it and hope you will be too. With that, I would like to introduce our panel of investing experts here to share their insights on this week's market activity and more.
George Mateyo, chief investment officer, Steve Hoedt, head of equities, and Rajeev Sharma, head 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.
Taking a look at this week's market and economic news, we've got three primary pieces of information to share with you, but a lot of data included in them, so we'll try and cover everything as fast as we can and get to our panel for our discussion. So first, earlier in the week we had the Institute for Supply Management PMI data or Purchasing Managers Indices data, which showed two sides of the economy.
The first was that in March the manufacturing side of the economy moved into an expansionary phase for the first time since September of 2022. So really good to see that in terms of encouraging data.
On the other side of the coin, the services side of the economy was slightly down in March, but has been in growth mode for basically the last 45 out of 46 months or almost four years now. So good sign in there in terms of the services economy overall. Second, we'll have to get our panel's take on this because over the past few days into last week and this week, we've had a lot of Federal Reserve speak in terms of some contradictory comments about whether or not the Fed will loosen policy going forward for the remainder of their year based on the data that they see or whether they'll hold rates constant. So we'll get a couple thoughts from our panel as well.
And finally we've got a slew of employment related information, so we'll give you those updates here in terms of the jobs opening reports, which basically came out earlier in the month, earlier in the week, for the month of February and change little at 8.8 million, but is still robust in terms of job openings from employers. Also on Thursday of this week, initial unemployment claims basically continue to hover near the cycle lows at around 221,000, which still remains favorable.
And finally, the employment situation report that came out 8:30 A.M. this morning covered two major areas which we look for on an ongoing basis because the Fed also watches. The first being new non-farm payrolls, which came in from March at 303,000, which were higher than expected and higher than the average monthly gain of roughly 231,000 over the past 12 months. But revisions in January and February have been volatile and actually were slightly better than expected with revisions 22,000 jobs higher than previously reported. The unemployment rate is the other side of that report, which changed little from 3.9% last month to 3.8% this month in March.
And just so you know, for the past say, I don't know, six to nine months, that unemployment rate has been in a narrow range of roughly 3.7 to 3.9% since August of 2023, so it hasn't really vacillated that much, which again continues to show the robust nature of the unemployment front.
So George, let's turn to you first for some of your thoughts on all the economic data and ask the question, do you think inflation will remain a little hotter than expected given the strong jobs report this morning, and will it be hotter just like the sun and eclipse the opportunity for the Fed to lower interest rates this year? George?
George Mateyo:
Well, in short terms, Brian, the answer would probably be yes. I think it is likely that the Fed has to start recalibrating policy a little bit. We've talked about the fact that things are doing quite well from the big picture perspective and this morning's employment report was really probably no exception to that. The trend continues. We've now actually seen, I think 23 of the last 26 months hotter than expected job numbers, and this number was kind of a whopper, frankly, had over 300,000 jobs being added in the month of March. That's about a hundred thousand more than I think the consensus are looking at. So again, we continue to actually see upside surprises when it comes to the overall economic numbers. People were expecting some moderation. We were probably in that camp too where we thought we'd see some cooling, but not really a stalling out of growth and we haven't seen that cooling yet. So things continue to do quite well from the overall big picture perspective of the economy.
And yeah, I think because of that, the Fed has to think about maybe taking off a rate cut or two from their forecast. I think it's probably important to note though that that might sound like an ominous statement when we talk about fewer rate cuts than expected. But we've asked this question all the time, which is if they were cutting rates, the bigger question is not so much how many cuts they would be putting into the system and putting maybe some further accommodation. But the bigger question is why, why are they cutting rates if the economy is doing pretty well? And again, that's kind of the question this morning where we see overall numbers quite strong. So I don't think it's really boom and doom. I think it probably does suggest that the economy's doing pretty well.
We also saw broadening out in terms of the sectors, so it suggests this is more of a broad-based recovery, which is certainly good. And wages, which is probably the biggest thing that the Fed watches in this report, I would guess, also were pretty healthy. They weren't really run away, so it wasn't a big spike upwards, but it was a little bit higher maybe than expected and continues that trend of ongoing wages. So you've got that impulse going through the economy, which means probably incomes will probably stay elevated and spending will also probably fall along with that as well. So I'm not too surprised to see a few fed speakers this week, which you've talked about, maybe suggesting a policy change. There's been a few other people that are suggesting something differently. So when I think about this though, I think the Fed probably will have to consider maybe taking a cut or two off the table, but what are your thoughts?
Rajeev Sharma:
Well, George, with that strong jobs report, as you mentioned, the idea that the ten-year yield will soon get back to that resistance point of 4.5% is something that's on the mind of investors. Also, what the Fed's going to do as far as rate cuts, will they continue on their path of three rate cuts? If you look at the initial knee-jerk reaction by the market just on that jobs report, the 10-year climbed nine base points right away to 4.4%. So these are big moves. It also puts the no landing narrative back in play, a notion that rates may be higher for longer. Currently, the odds of a June rate cut are hovering around 53%. It's down from 70% that we saw right after the FOMC meeting. So these are moves, these are market expectations coming to terms with not only jobs report, but many other factors that have been in play for the last couple of weeks.
We had the market breathe a sigh of relief following the March FOMC meeting. That's where Fed Chair Powell, he talked about three rate cuts. The dot plots were pointing towards three rate cuts for 2024, matching market expectations. But after that meeting, we did have plenty of fed speak this week. Fed members were coming out giving conflicting narratives on how many rate cuts should be expected by the market. Specifically, we had Atlanta Fed President Bostic come out and say that it would be appropriate to lower rates in the fourth quarter of the year due to this, if you will, bumpy nature of inflation. This would mean that that would be about one rate cut this year. And again, he was pointing to the strength of the economy, the labor market, and that stubbornness of inflation. His comments immediately saw yields rise across the yield curve, but particularly in the front end, which is most sensitive to Fed policy.
That happened. And then right after that you had Fed Chair Powell come deliver remarks at Stanford Forum also this week where he pretty much stuck with the narrative that he had during the Fed meeting. He said that we continue to look at inflation, continued to look at the data, but we do expect rate cuts for the second half of the year. Didn't really waver from his three rate cut forecast or that of the Fed. And that's where we saw yields move lower. So this is kind of like a ping pong on yields over here. Other Fed members also are very vocal this week we had Kashkari who is known to be a hawk, he came out, he said he supports two rate cuts for 2024. You had Cleveland Fed President Mester also come out, said that we need a few more months of data to assess inflation. And then you had other members too, Goolsbee, Barkin, Harker, they all chimed in with their own take on where we are as far as rate cuts go. But all of them had one theme in common that they need more clarity before cutting rates.
It also seemed like none of these Fed members that were speaking this week were really talking about an urgency to cut rates. I agree with your point, George, about it's not how many rate cuts, it's why we're cutting rates. I think that's kind of the narrative that the Fed's trying to say as well, that we need to see the data. But all of their comments, if you take them in aggregate, most of them worked against the market expectation of pre-rate cuts for 2024. And that's why we saw yield move higher and that's why we saw those percentage probabilities move down for that June rate cut meeting.
What could bring yields lower? Well, there's a couple other things happening. I mean, the Middle East tensions rising. There's been a lot of talk this week about the market going into a risk-off mood. Over the past several sessions of the market, we did see this run to the Treasury market. We have seen yields move lower before today. And a notion that these geopolitical tensions, they may compel the Fed to cut rates sooner rather than later in the year, sooner being maybe June. And then you have today's job reports once again puts the spotlight on the labor market and the economy as a whole.
So these are a lot of moving parts in the market. The market's trying to grapple with this. The Fed's trying to stick with their narrative, but they're making it extremely clear that we need to see that inflation was just not a spike that we saw recently. There should be some pooling. We're going to get more numbers next week on inflation. I think that's going to be very important. And I really feel that in these times you need to be remain nimble and these markets, we need to value not just the economic data, but we need to value the Fed narrative that continues to come out, to kind of get a sense of where we're going now.
George Mateyo:
Steve, I'd be kind of interested to get your take on all these data points as well, but we also have earnings that are starting to come out I think probably in the next seven or 10 days or so. Do you think that this earnings season will be, I don't know, a market influencer or are we going to be still focused on the Fed and as Rajeev pointed out, geopolitical events and so forth? Or is it really more of a story about earnings?
Stephen Hoedt:
It really does seem to me, George, that it's a macro-driven market. Earnings can help at the margin, it helps tell the story. But look, the numbers that you see in the jobs report this morning reinforce the strong growth narrative. So it seems to me that earnings will likely do the same thing. That's what we saw coming out of the fourth quarter when we had Q1 earnings numbers. They again reinforced that strong growth narrative. And the other large data point this week, at least for me, was the ISM coming in above 50 because that shows that you've got expanding manufacturing economy here in the US and that is again, bullish growth. So if you look historically the thing that correlates the best with the S&P 500 and with earnings growth, it's the ISM and the fact that that's back in expansion territory is yet another feather in the cap of those who have not been in the recession camp, right? So I think we're set up pretty well there.
That being said, the market coming into the session this morning was down 2% for the week because very clearly there's been some pivoting from the pivot, shall we say, I mean they pivoted in December, meaning the Fed, and it seems like they're really, really backpedaling away from what they did back then and the market's having to digest that because it certainly seems like the inflation numbers are likely going to plateau someplace higher than what they like, but yet I think the investment community still believes that we're on the cusp of a multi-year easing cycle. So the question's going to be the push versus pull on that. And of course you have some geopolitical stuff coming in with Iran and Israel and that kind of stuff this week and that kind of pushed the energy markets higher, which the market definitely did not like yesterday.
So there's a ton of stuff going on, but really it does seem that the Fed and the growth macro and the push-pull there is really going to define where we go over the intermediate term. And quite honestly, we're finishing up, April's the last month of the best six months of the year, so maybe we're going to have people talking about selling May and go away again this year because as we head into the summer, you get that kind of seasonal bias against the market a little bit. And when you've got this kind of macro narrative playing at the same time it gets to be a bit more of a two-way market other than just kind of the one-way market we've had so far year to date.
George Mateyo:
What influenced, Steve, does oil have on earnings? And I wonder because there was a time in the past where people would think that higher energy prices would maybe take a dent in consumer spending and maybe would kind of trip profit margins, but as you pointed out on these conversations, the US is more energy-dependent. In other words, we produce more of our own energy than we have in history. So maybe there's a benefit there, but I'm not sure if there's any strong correlation or any read through there, but it got my attention too, as you pointed out, when you see the price of oil hovered around $90, again, if that's a good thing or a bad thing for earnings.
Stephen Hoedt:
Well, it's actually a good thing because if you take a look at the weight of energy in the S&P 500 is only 4%, but it punches way above its weight in terms of contribution to earnings. It contributes well north of 10% of the earnings power to the S&P 500. So just from that simple math perspective, we are likely going to see a benefit instead of a drag from higher oil prices. It's very simple. When you look at the OECD inventories, OECD oil inventories are tightening when you get those numbers out of the IEA. When inventories are tightening, prices go up. So that's where we're at. And if you get China coming back a little bit more than expected, that'll put additional pressure on it to the upside. So things right now look like, I'm not going to tell you we're going to go to a hundred bucks this summer, but I think it's going to be a driving season that we're heading into where people are going to be paying higher prices for gas.
George Mateyo:
Same question for you, Rajeev, maybe a bit differently, but what do you think higher oil prices mean for the Fed and their outlook for rate cuts and inflation?
Rajeev Sharma:
That has been a factor that the Fed has focused on? I think the Fed had the advantage when oil prices were not hovered around this $90 point that we're seeing today. I think it plays into their thinking of how this is going to impact inflation and whether that's going to keep inflation higher. But does it slow down the economy and do we start seeing those numbers? I think those are the two factors the Fed's going to look at when it comes to oil prices. One is what is going to be the impact on the gas pump for the consumer if that's going to change the way consumer spending is. I think they may see that we're going to anticipate a slower economy going forward. So far though, they haven't had to deal with these levels that we're seeing right now. So it's going to be a new thing for them to focus on, for sure.
Brian Pietrangelo:
Well, thanks for the conversation today, George, Stephen, and Rajeev. We appreciate your insights. 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 5:
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