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, September 6th, 2024. I'm Brian Pietrangelo, and welcome to the podcast. In case you didn't know, today is the celebration of National 410k Day, and 401k stands for the actual IRS code that allows you to prepare for retirement by saving in a tax-deferred vehicle through your employer. So if you are headed in that to direction good news for you. If you aren't maximizing your 401k, you might want to take a look at it. And this actually started in 1996 under the Plan Sponsor Council of America, and again is a big part of our ability in the United States following Labor Day as a reminder for those to contribute to their retirement.
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 Rajeevv 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, we add our national call just on Wednesday this week with a special guest talking about the implications for the election. So 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 have four key updates for you in terms of economic data.
Starting with first the Institute for Supply Management PMI or Purchasing Managers' Indexes came out for both manufacturing and services. In the manufacturing side, it continues to be a contractionary environment even though there was a tick-up in activity in August. But bottom line is that there has been a contractionary environment for roughly the past two years. In addition, on the services side of the economy, we've been basically in an expansionary environment, basically looking at a roughly four-year period or 48 out of the last 51 months where there has been an expansionary opportunity within the overall services part of the economy. And second, in terms of economic activity, the Federal Reserve's Beige Book came out on Wednesday, which comes out a couple weeks in advance of the upcoming federal open market committee meeting on September 18th where it showed economic activity grew slightly in three of the 12 districts while nine of the 12 districts reported flat or declining activity.
So some slowing in that particular read. And again, this rose from five districts which had declining activity up to nine in the most current period. So definitely the balance has switched from an overall economy that is slowing or declining rather than growing. In addition, employment levels were steady overall and reports were layoffs remained rare and consumer spending ticked down in most districts, having generally held steady during the prior reporting. And third, the job openings and labor turnover survey report came out from the Bureau of Labor Statistics also on Wednesday, which shows that job openings came in at 7.7 million for July, which was down from 7.9 million in June, which was also revised down. So again, another data point to show that employers are not necessarily hiring as many as they have in the past in terms of job openings. And finally, or fourth, the employment situation came out from the Bureau of Labor Statistics just this morning at eight 30 where it shows two key elements of that report.
One, starting with the unemployment rate came in at 4.2%, which was down slightly from 4.3% in the prior month. And total non-farm payroll employment increased by 142,000 over the prior month, which was slightly below expectations, but still positive. And more importantly, the change in total non-farm payroll employment for the previous two months in June and July combined were revised down by 86,000. So again, definitely a number of factors for the Federal Reserve to consider in terms of the overall employment situation and the employment market. So George, let's start with you. Get your reaction to what's happening with this overall data and what your thoughts might be for the economy and our investors. George.
George Mateyo:
Well, happy 401k Day to you too, Brian. I guess the mantra, save early, save off and probably should be part of our lexicon today, but we'll save that for another day. I do think it's great invention that this 401k plan was created a couple of decades ago, but I think more importantly people... for our listeners anyway, but curious to know how we see things playing out from the economic and market perspective in the near term. And I guess all the statistics, you ran a lot for important ones. I think that probably the big report of the week of course was the data that was released earlier this morning here on Friday. And frankly I think it's probably a little market unfriendly and probably Fed friendly in the sense that it was a little bit of a mixed bag for sure, and all things being equal, I think the Fed probably is pretty happy to see that they don't have to make a big decision right now in the sense that they're probably low to jump in the fray too much and cut too quickly.
And the data gave them a bit of an out in the sense that the data was somewhat on the soft side, at least based on some of the headline numbers. But also there were some signs of strength too. So if you go through it, payrolls were a little bit higher than expected, which was better. I mean, we kind of saw a month-over-month increase. I think the Fed is still kind of denying the fact that there was any hurricane with impact last month, but I still think there probably is some there.
And the employment rate moved lower actually, which is a good thing too in the sense that there was some concern that that was moving a little bit in the wrong direction and that ticked down just a small amount, but still was in the right direction. But then I think if you kind of tear through even some of the more detailed numbers, wages are actually ticking up again, which is probably good for future spending, probably not good for inflation, but it's so good for future spending which kind gives more resilience to the overall labor market areas as well.
So I think the overall summaries I see is that the Fed is probably go forward with its rate cutting plan when they get together later this month. I don't think it's going to need to do 50 basis points unless things really weakening in the next few weeks or so. And the market's going to probably struggle around with that because I think the market probably wants a bit more stimulus in the near term whether or not it's warranted or not.
But I think we'll have to of course, other things to focus on between now and then inflation will be out. I think there's some Fed speakers, Rajeev, that are talking today as a matter of fact that we'll probably have to pay attention to. I think the big number for me, Rajeev, or the big thing we'll have to pay attention to when the Fed does meet later this month is that thing we call the Summary Economic Projections or the SEP. And that'll probably be more important in terms of what the Fed is thinking about doing next year. So if I think about this again, I think 25 basis points is probably baked into the cards. 50 is a bit of a stretch, but what do you think?
Rajeev Sharma:
Well, I agree with you George. I think that 25 basis points was baked into cards, but we saw the jobs number come out today and it kind of supported this Goldilocks theory that the bond market's having right now and there's not much doubt that we're going to get a rate cut this month. But now the question is the magnitude of the rate cut that comes into play at the September 18th FOMC meeting, do we get 25 basis points or now the market may starting to think about 50 basis points of a rate cut, why would they think about 50 basis points? They scrutinized the data today, they looked at the revisions numbers, which pointed towards a softer more cooling of the jobs market than projected earlier. So the market just tries to grab onto any notion they can to try to get... almost manifest a 50 basis point rate cut by the Fed.
And you saw that as soon as the jobs data came out, bond investors sold at first and they bought on the dip. And if you look at Fed rate cut expectations by the market, pre-data the market was pretty much certain that we're going to have a 25 base point rate cut at this upcoming meeting. After the data, the expectations of a 50 basis point rate cut started to climb and we now got pretty close to 50/50 on that as far as a 50 basis point rate cut, which I think is a little overblown. I think this will be short-lived. I do think that we have, like you mentioned Fed speak today, Fed Reserve governor Chris Waller is giving an economic outlook this morning. I feel that he will work to bring the market back to that 25 base point rate cut expectations. I don't think the Fed really wants to be perceived as being behind the curve when it comes to rate cuts.
50 base point rate cut likely shows that the Fed is panicked and I don't think they are panicked. The Fed still believes in their soft landing scenario and they're likely going to stick to that theme. And Waller's commentary is very important because last year when Chris Waller gave this commentary, it was in line with what the Fed did and what the Fed communicated. So again, Fed speak takes center stage and we're going to keep an eye on that. Another important point that I think we have to keep an eye on is that the massive bond supply that we're seeing in the pipeline, we've seen corporates and treasuries massive issuance. This puts the bond rally that we're seeing at some risk. We had $80 billion of new investment grade bonds issued this week and we're expecting another 35 billion issued next week. We also have $119 billion in treasury coupon supply coming due.
And all of this requires rate locking and hedging to digest these new deals. So it's going to keep us somewhat of a limit of how much lower yields can go on the front end. And I think we're going to have to keep an eye on that because supply is a very big part of this market. We've seen tremendous supply this year, and it does really start to limit how far bond yields can go lower and not just the rate cut of September being an important event.
You had mentioned the Summary of Economic Projections. I think that's going to be extremely scrutinized by the market. If you listen to Fed speak, their view seems to be that the jobs picture is pretty much in balance. Fed chair Powell noted that we're roughly where we were pre-pandemic on that balance between jobs at inflation. And the clear message that the Fed wants to give the market is that we're going to take baby steps slow and steady at 25 basis points on a clip until the data suggests otherwise. So the Fed messaging is clear. Though the Fed funds rate is restrictive, I think the Fed's dual mandate goals are roughly in balance, something which doesn't require the Fed to really go out there and do a 50 basis point panic button on September 18th. Had we had seen unemployment go to 4.5% today, I think this story would've been a lot different.
George Mateyo:
Oh, absolutely. Yeah. I would agree with you, Rajeev, that if we saw the unemployment rate even tick up maybe to 4.4 or 4.5 as you said, would probably be that notion that things are really falling apart or slowing down materially, I shouldn't say falling apart, but definitely slowing down. And right now we're still in that kind of slowdown category it seems like to me. Steve, if we look at equity markets, they seem to be a little bit discontent with the news this morning. Do you think that the equity markets are looking for more cuts right now?
Stephen Hoedt:
It feels to me, George, the market's trying to figure out a way to bully the Fed into a 50 basis point cut when I think the Fed and maybe the bond market folks are much more comfortable with a 25 basis point cut. So it's like the equity market is pricing in what feels to me like a much more aggressive stance than what some other market participants are. So I think very clearly the equity market has bought hook, line, and sinker into the soft landing narrative and is price and things pretty aggressively. So I think that we're probably set up for some disappointment there because it feels to me like given Rajeev's commentary and others that we see, 25 is much more likely than 50 at this point and there's not much data between now and the meeting to trip things the other direction. So we'll see how it goes. But September, and we're in the middle of a crazy election season, so volatility I think is the one thing I would say is likely to head higher for sure.
George Mateyo:
In terms of volatility, I also think that it's worth commenting a little bit on what's happening in the energy complex this week. I mean, the price of oil has been oscillating in this 90 to $70 range for quite some time. We're really at the low end of that range right now, probably on weakness or concerns about weakness from China and other parts of the world. But I don't think it's really a recessionary indicator for the US in the sense that historically when you see prices of oil come down, it's probably good for consumer spending overall. But what's your take? What's happening in the energy market these days?
Stephen Hoedt:
Yeah, you're right George, about the range between 70 and 90 and we're at the bottom end of that and we have tended to go to the bottom end of that when there's concerns about global demand more so than anything else. And over the last month, month and a half, it's continued to look like China has some economic issues that it's working its way through and demand looks like it's coming in a bit light there. And you've got this coming at the same time that you've got OPEC actually talking about modest supply additions coming back onto the market, whether it's from Libya or other places. So you've got a little bit more supply looking like it's coming into the market at the same time that people are questioning some of the demand numbers based on global economic current situation. And that's caused us to navigate our way back to the bottom end of the range really it feels to me like here the downside is somewhat limited because unless you get a recessionary scenario, you're not going to see us collapse down to $40 bucks again, in my view.
It really would take a synchronized recession in the western economies to push us down to those levels again. And quite honestly, you'd get such a sharp turn in of US supply in that scenario that we would likely snap back to 60-ish really quickly. So it feels like this range is pretty well-established and we're likely going to be here for a while. I would also tell you though, that it's... when you look at the various actors, it's very clear that Saudi Arabia has taken control back at the market over the last couple of years to reassume the position of the swing producer.
They've been raining in production, but the issue that they've got is that they're not necessarily able to keep all of their neighbors in line. And the one that I would single out and the Saudis have talked about this is Iraq. Iraq has been producing more than what they're supposed to under the quota system that has been putting pressure on price. And it feels to me something that we're going to hear about more so in the not too distant future is the Saudis trying to put some pressure on Iraq among others to get production more in line with quotas, which would help stabilize again the price here at the bottom end of this range.
George Mateyo:
So you mentioned it's election season and the silly season I guess more specifically is upon us. Do you think, Steve, there's anything we should be noting with respect to energy policy irrespective who wins the White House? I know it's been an oft-talked about issue, but anything politically that we should be sensitive towards to as we think about energy?
Stephen Hoedt:
I mean the funny thing is people talk about the blue team and the red team as if they're kind of like binary outcomes and one is better than the other. But the funny thing is that the stocks actually have performed better under the blue team here over the last four years than they did under the red team, the prior four. So I don't really know if there's anything that we can take away from it from a policy perspective other than if you look at the reaction function that the energy stocks have had immediately post-election, both of the last two times, there have been significant moves in the month or so post-election once we get the lifting of uncertainty. And so I anticipate that we'll see the exact same thing happen this time. But again, like I said, I caution against reading too much into the red team, blue team stuff because again, it's played counter to the "prevailing narrative" over the last two election cycles.
George Mateyo:
Yeah, I think that drives what we said a few times on these conversations in other places too, which is some of these more "obvious political calls" when you think about putting a trade on and the market's probably usually wrong. So that's probably a good call out for sure. And just on the election theme, I'll just mention that we held a call this past week to talk about our election outlook, and I had a great guest speaker, so if you'd like a replay, please reach out to your adviser. And I'll just close by saying real assets I think still deserve a place in the portfolio, even though that energy prices have come down, maybe the asset levels of certain commodities have also come down, but I still think that real assets are a good diversifier and if anything else, real estate now seems to be maybe a chance to redeploy some capital as maybe rates rather get reset there too.
So we still think that real assets deserve a role in portfolio. We still like equities and really tilting towards quality. We also have a view that maybe investing some of the less demanding sectors in terms of valuations might be more lucrative right now than chasing some of the high valuation names. And overall, our view remains of just being bounced towards risk overall with respect to your portfolio.
Brian Pietrangelo:
Well, thank you for the conversation today, George, Steve, 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.
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