Brian Pietrangelo [00:00:01] 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, September 19th, 2025. I'm Brian Pietrangelo and welcome to the podcast If you are keeping track of the meteorological calendar, Monday coming up on September 22nd for 2025 is actually the origination of the season known as Autumn. It's a great time of year here in the Midwest and many other places during the country where we begin to see the leaves change and other things take over, but still have decent weather. So again, get out there this weekend if you can and really enjoy it while it lasts. Football season's also in full swing, whether you're talking about the pros, the college sports, high school, or just pee-wee football. Any way that you can look at it, again, if you love football, this is a great time of year. Enjoy it on Saturday and Sundays, and other days at the play.

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, Rajeev Sharma, Head of Fixed Income, and Cindy Honcharenko, Director of Fixed Income Portfolio Management. 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. We just put a piece out on the Key Questions series about what we think is happening for the remainder of the year given that we are in the ninth month of the year, which is September. 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 quick economic updates for you and then a pretty big discussion on our last topic. So in terms of the three updates, number one, earlier in the week, we had retail sales which came out for the month of August, which was pretty decent. It was up 0.6 percent from the previous month and the previous of July was also revised up. Now, here's the key point to this. Retail sales was up 0.6 percent, which was favorable, but two-thirds of that was due to price increases and one-third of that due to actual spending increases. So we'll continue to watch that. We'll take it for a good sign, as it is right now.

Second, on the other side of the economy for manufacturing, we have industrial production, which was also released this week, which was a positive 0.1 percent in August, which was a nice swing back after it had declined 0.4 percent in July. So again, we continue to watch these two as indicators of both sides of the economy and for right now both had decent news.

And third, just yesterday we had the weekly initial unemployment claims report which we continue To share with you almost on an every week basis because it's a leading economic indicator And so last week we had a pretty big increase When it went up to roughly 264 000, so we said let's not overreact. Let's see if it's just a week-over-week issue It's our bigger trend This week, ending September 13th, the number came out at 231,000, so it went back down about 33,000 which was 231 thousand to go back 33, 000. So again, basically a point up and a point down over two weeks. Generally speaking, this continues to be a favorable number and that is not showing massive increases in the initial claims environment. As we have reported to you in the past, the new non-farm payroll softness has one indicator of the economy in the jobs market. We look at this one in initial unemployment claims as well as a few others to try and get a total read.

Now the big news for the week was the Federal Open Market Committee meeting on Tuesday and Wednesday with the press release and Jay Powell's press conference on Wednesday afternoon and then the market reaction to it. So we'll jump right to Cindy Honcharenko to get the update and recap of the Federal Open Market Meeting in terms of the summary of what happened and how did the markets react.

Cynthia Honcharenko [00:04:09] So the Fed cut the federal funds rate by 25 basis points, and this lowered the target range to 4 percent to 4 1⁄4 percent. It was the first rate cut of 2025. The voting was not unanimous. One descending vote, Stephen Miran, preferred a larger cut, 50 basis points. The statement was, was said that the Fed will carefully assess incoming data, the evolving outlook and the balance of risk before making further adjustments, the rationale behind the decision, softening labor market, risks to the dual mandate, shifting toward employment concerns, still elevated inflation, upgraded growth projections due to economic momentum and maintaining flexibility and preventing tighter monetary policy from doing harm.

As far as the press conference, Chair Powell noted that inflation is higher than desired, goods price inflation has picked up, near-term inflation expectations have drifted up as well. He also stressed that labor market demand is softening, job gains have slowed, the unemployment rate has edged up, and there's less supply of workers, et cetera. That creates tension in the dual mandate. He said downside risks to employment have increased while upside risks to inflation persist. Because of this, the Fed judged it appropriate to move toward a more neutral policy stance. And the September rate cut was part about risk management. Powell made clear there was not broad support for a larger cut of 50 basis points at this meeting. He did emphasize that future policy adjustments will be data dependent and meeting by meeting, not predetermined.

So what are the likelihood of Fed rate cuts later this year? Currently, the futures market sees a very high probability of another 25 basis point cut in October at 92 percent after this week's decision. The probability of a 25 basis-point cut in December is sitting at 89 percent. More than two cuts is less likely unless inflation declines faster than now projected or labor market weakening accelerates significantly. That might be in the 20 to 40 percent range depending on negative risks. How negative risks evolve.

And a high level summary on the SEP for 2025 year end: the median projection for the federal funds rate is three and a half to three and three quarter percent reflecting two more basis point rate cuts. The GDP growth projections for 2025 was upgraded to one point six percent. Unemployment projections remain steady at four and a percent. And PCE inflation projection is 3 percent and core PCE projection is 3.1 percent, still above the Fed's target. George, I'm interested to hear your insights from this week's Fed meeting.

George Mateyo [00:07:13] Well, Cindy, I think the phrase you used, “risk management,” was an apt one. And I know the chairman talked about that. I think that market is probably a little confused though. And frankly, the whole thing was kind of confusing to me. You talked about, for example, a lower interest rates on some concerns that maybe the labor market is softening. We've talked a lot about that on these calls and other places too. And so they felt they had to do that to kind of maybe stave off some of the downside risks from a weakening labor market. But at the same time, as you also noted, they upgraded their forecast for growth later this year. So it's kind of curious to me to see those things happen at the time. In addition, I think it's also curious that, you know, the Fed is cutting rates at the same time the stock market is at or near all-time highs. Credit spreads that Rajeev tracks very closely are at really all time heights. So the overall risk appetite among investors is really quite low, and - I'm sorry, the risk appetite is high, rather - and so the sentiment is kind of curious to say the Fed needs to cut rates to work around some downside risks.

I guess I think it's kind of also noteworthy Rajeev to see that after the news that came out on Wednesday, bond yields actually rose. And that's a little bit to me reminiscent of what we saw last year at this time where the Fed cut techie basis points, interest rates rose into the end of the year. Maybe that's just a reflection of the fact that again, the outlook for growth is a little better than people thought. Maybe there's still some concerns about inflation. But if you look at that, Rajeev, how did you interpret the market reaction? And then I'm curious to get Steve's take on this because of course we saw a really big move in the equity market the following day. So Rajeev what did you think?

Rajeev Sharma [00:08:54] All great points there, Cindy and George. And you know, the thing is, the unusual part about this FOMC meeting, it was really, you know the late introduction of Stephen Marin to the committee and whatever dovish tilt he would provide to the table at that point. He was the only dissenter. Unlike the last time we had a meeting, the FOMCs meeting, we had two dissenters, Chris Waller and Michelle Bowman. So, and they both have opportunities to perhaps take over Powell's position next year as Fed chair, but they were voting, keeping data in mind.

To your point, George, I think the yield curve reaction was an interesting one. The 10-year had pretty much rallied very hard going into the FOMC meeting, so there was that risk of a near-term sell-off on the news of that rate cut. The market had anticipated 25 basis points rate cut, so the 10- year and the 2-year both were rallying very strongly throughout the month as we got close to the FOMC meeting. But right at the release of the statement, the 10 year actually did even fall below 4 percent for a very brief period of time. But since then, to your point, George, the 10-year treasury note has steadily climbed and now it's around 4.1 percent, it's above 4. 1 percent. The expectation is that buyers tend to step in at these levels. Since mid-2023, we haven't seen many stretches of time where the 10-year has traded below 4 percent except for one stretch of time between August and October in 2024. But the range of the 10-year has pretty much been 4.1 to 3.992 percent since September 8th. And it remains below short, medium, long term moving averages.

Now, the two year Treasury note yield also is very sensitive to monetary policy. We saw a sizable drop in the yields right up to the two o'clock point of the FOMC meeting. But after the statement was announced and the press conference began, we did see the two year go right back up to high for the day. And we remain about three basis points higher on the week at a yield of about 3.56 percent. Now, what is this telling us? It's telling us that, you know, buyers have not stepped in yet. We saw the same story play out last year when rates were cut. But I do feel that there is a point where buyers will start to step in again. And I do think that it's gonna happen once some of this dust settles. The data continues to be extremely important, not just for the Fed, but for the market participants as well. And I think we're gonna see more and more scrutiny on data.

If you look at credit spreads, as you mentioned, they have been extremely well behaved and remain that way this week as well. In fact, both investment grade and high yield credit spreads have seen their moves tighter on the week and credit spreads. Have had a pretty good run in calling the economic outlook in recent years. As an indicator, they've outperformed other indicators that look at the economic outlook. So it does look like corporate bond investors are in no rush to turn bearish even with yield premiums falling after the Fed’s rate cut this week.

I do think that returns remain strong for investment grade, but credit investors will now start to get a little nervous - and you can see this theme start to play out for the rest of the year -credit investors are going to get little nervous about the U.S. labor market and consumer sentiment. Both of those remain uncertain at this point, so we've talked about uncertainties that remain in the market. I think that continues. Treasury investors appear a lot more concerned about the economy as the labor market is showing signs of cooling. And you can see that with the 10-year yields remaining on the higher side.

But with the Fed meeting in the rear-view mirror, bonds are kind of refining their views on the economy. Investors who were long headed into the FOMC, they're likely to be taking some profits right now as they wait for more data. And this should continue that steepening trade that we've talked about many times on this call.

George Mateyo [00:12:28] Steve, I think the last time the Fed was cutting rates and earnings growth was kind of exploding, frankly, was back in the late 90s. Do you think there's any parallels with that period now today from 25 years ago or so?

Stephen Hoedt [00:12:42] George, I have to tell you, it sure does feel like it to me. I mean, when you look back at the way that the market was dominated by technology, large cap technology in the nineties, um, Cisco systems with the, the flagship back then, Nvidia is the flagship today. Um, you know, you see a very similar picture where a Fed cut rates paused for a while, reignited a rate-cutting cycle while the market was at new highs, and it ignited a boom in equities. But here we are with the Fed entering into a rate cutting cycle after a pause with equities at new highs and earnings continuing to do what they're doing. And you've got a mega cap tech-driven bull market that they're doing this into. So there are a lot of parallels. It's rhyming. I mean, things aren't exactly the same, right? There are differences. When you look at the earnings contribution of the tech sector to the S&P 500 today, it's more than double what it was back in the 90s. So there's much more of a fundamental backdrop for what's going on in terms of the equity price moves than what you saw when people were looking at eyeballs and sock puppets back then.

But I think that there are clearly things that investors need to be aware of and pay attention to. That said, the track record of what happens to equities when the Fed cuts with the market at all time highs is also pretty clear. And if you look at it, once you go a year out, almost without exception, the market's been higher and it's been a higher than average than the average one year return on a 12 month forward basis. So, this is a bullish setup for stocks. Even though it's hard to kind of make the case that with this market trading at 22 and a half times earnings that you want to be bullish here, but when that's what the data says, when the Fed is cutting in this type of an environment. So things can get even more ebullient than they already are.

Brian Pietrangelo [00:14:50] Can we take that theme and go a little bit further to the manufacturing sector and a little bit of the Nvidia-Intel story that we're hearing in the news today?

Stephen Hoedt [00:14:59] You know, it's an interesting piece of information or interesting development that happened this week. And when you think about it from the perspective of these two companies, Intel's obviously had a lot of trouble over the last 10 years or so as they've seen the world change and they've really not changed all that much, still being very PC centric and we've all moved to mobile devices and tablets and what have you. From Nvidia's perspective, it is a low-risk way to try to catalyze AI-PC adoption, in our view. Obviously, there's some political implications here, too, when you think about the idea of investing in US manufacturing as opposed to pushing investment in manufacturing overseas. Could there be a boundary partnership between these two companies going forward? I think is the real question that the market wants to know, because Nvidia doesn't use Intel for foundry services today. They're pretty much exclusive with TSMC, Taiwan Semiconductor. And, you know, Taiwan Semiconductor is making investments here in the U.S. Because of the influence of the administration and some of the acts that have happened here, too. So, you now, maybe maybe that happens down the road. But it did catch my attention as well.

And again, when we go back and draw parallels to the late 90s, you think about a tech stock that's been a market leader coming on tough times, seeing an investment from a leading company in the technology space. We saw similar things back in the late nineties too, Brian, with Microsoft making an investment in Apple when Apple's around $10 a share. So I don't know that we can draw exact parallels again from then till today. Doesn't mean that Intel is going to become the next Apple for sure, but clearly there are again echoes of what happened back then happening today.

Brian Pietrangelo [00:16:55] Well, thank you for the conversation today, George, Steve, Rajeev, and Cindy. 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 very 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.

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