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, January 10th, 2025. I'm Brian Pietrangelo and welcome to the podcast. Thanks for joining us. This is our first podcast of 2025. We were off the past few weeks celebrating the holidays with family and friends, and I want to wish everyone out there listening to us a happy new year. I'd 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.
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 activity, we're going to put that second, but first we're going to take you back to December of 2024 and remind you of some key economic updates that came out right before a lot of people went out for the holidays and that way it'll set the stage for our conversation here beginning in the new year. Back on December 18th, the Federal Open Market Committee did cut interest rates by 25 basis points, but it was somewhat of a confusing meeting because inflation continued to remain hot and it did question what the policy would be for the Fed to actually cut rates in 2025 where the estimate used to be something in the vicinity of four cuts and now it's been revised down to roughly only about two cuts for 2025.
In addition, in their summary of economic projections released on December 18th, for 2025 they actually did raise the real GDP estimate. They also lowered the unemployment rate, but they did keep the PCE inflation estimate higher than estimated before. The following day on December 19th, the last estimate for the quarter number three for 2024 for real GDP for the US economy came in at a 3.1% annualized rate, which was higher than the previous estimate and also higher than the second quarter. So good news there, the economy continues to remain resilient and growth continues to be driven by consumer spending. And finally, on the Friday or December 20th, the PCE or Personal Consumption Expenditures measure of inflation for November did come out and showed some moderation on a month-over-month basis. But on a year-over-year basis, it continues to remain sticky with the all items number being 2.4% annualized growth rate year-over-year, and core excluding food and energy was 2.8%.
Both of these numbers were higher than previous months and continue to remain sticky without us seeing any type of meaningful decline. So the topic of inflation that has been on the topic list for the past two to three years will continue to be on the list of discussion items for 2025. Turning specifically to this week's economic news releases, we've got three updates for you all employment and job related. First job openings under the JOLTS report from the Bureau of Labor Statistics came in at 8.1 million for November, which was up from 7.8 million in October, which again shows some strength in the employment market where employers are willing to post jobs potentially needing to expand their staff. Good for the economy, will look at the inflation, may or may not be there. Second, the weekly initial unemployment claims data came in positive meaning it was lower than previous weeks, such that the week ending January 4th was at 201,000 initial claims.
So good news there. And third, just this morning at 8:30, the Bureau of Labor Statistics also came out with the employment situation report, which gives us two key items. The first being new non-farm payrolls for the month of December came in at 256,000, which was actually a little bit better than expected and again, shows strength in the market. And then the overall unemployment rate came down just one tick to 4.1% from previously at 4.2%. Again, the big question is back to the concept, is this good news is good news or good news is bad news? The good news means that the employment market continues to remain healthy. The bad news might be does it continue to point to an inflationary dynamic for which the Federal Reserve will have to make decisions about keeping a policy higher or can they continue on the path of cutting rates at some point in time in 2025? So with that, let's begin our conversation with our panel today, starting with George to get his overall reaction to the economic data and his thoughts for the future, George.
George Mateyo:
Well, Brian, happy new year and happy new year our listeners. I think it's probably the moment in time that we need to take stock of where we are since it's been a few weeks since we were all together last. And I guess as I think about the numbers that came out this morning, I think the kind of prevailing theme is that the amazing US economy continues to amaze and we've seen really kind of remarkable set of circumstances for much of this year. And I think if you kind of think about where we were at the beginning of 2024, most people thought the economy would be growing one and a half percent or so. We thought we'd probably add about a million new jobs and based on this morning's report, we're going to probably finish out the year adding close to 2 million jobs. And at the same time, the overall backdrop for economic growth is pretty solid too.
So instead of growing that one and half percent number I mentioned earlier we're probably going to finish close to three or maybe just a bit under three, but still that's a pretty decent delta between expectations at the beginning of the accounting year. And here we are at the end of 2024 and turn the page to a new year. So the economy itself is doing quite well. I think Wall Street probably is having some indigestion with that frankly, because it seems like the Fed is not going to be in a rush to cut rates and give the market what it wants. But the economy is doing quite well and that's good for mainstream, Main Street rather. That's good for the overall economy and that'll probably continue to boost spending, which will again cause the Fed to be on hold for a little longer than anticipated. So I think overall the news is good for the economy, but maybe less good for the overall financial markets, at least in the near term.
And we've seen rates back up quite a bit. It's interesting to me, Rajeev, to see the Fed come into this period of time where they started, I think in the summer seeing a bit of a slowdown in the labor market and now we're probably seeing more strength there. So as you think about what the Fed is thinking, maybe the beginning part of this year, we can't think about too far ahead, but do you think the Fed is going to be on hold? Are they even thinking about hiking at some point? How do you make sense of what we saw this morning?
Rajeev Sharma:
Well, George, it's a lot to make sense with today's blockbuster jobs report that did come out that continues to put pressure on treasury yields. It's keeping bond investors on the sidelines that continue to look for better entry points in the treasury market. I think the Fed right now is obviously they've been pigeonholed themselves into being data dependent. They've kind of pushed the market expectations to also be data dependent. So anything we see, like a report that we saw today about the jobs number is obviously going to move the market. We already saw the 10-year treasury yield move almost 10 basis points higher, right on the report release. For context, we started the year with the 10-year treasury note yield around 4.56%. Now we're at 4.74%, so that's quite a move in just a few days and it's pretty aggressive. It's about 20 basis points that we've moved in less than two weeks.
We also are at the highest levels right on the tenure that we've seen since October 2023. So typically at this level, I would expect buyers to get excited at these levels and maybe take advantage of some of these elevated rates, but that's not happening. And it's because investors now believe that we can go even higher in the rates and many bets are right now that the tenure can get to 5% fairly easily. So as we rounded out 2024, the market already began adjusting rate cut expectations for 2025. Back in September of last year, the market had anticipated five to six rate cuts for 2025, and then we had the December FOMC meeting where the Fed signaled two rate cuts for 2025. And that was enough to once again make the market really start to not believe in exactly the path of rate cuts going forward. I think the market's really at this point right now, where they don't really feel that the Fed is in any hurry to cut rates.
In fact, many things that we may not even get the rate cuts that we feel. I mean if you look at the probabilities of what might happen right now, rate cut expectations have moved to the second half of the year. We were around maybe June or July for a 25 basis point rate cut. Now if you look at the probabilities, the first-rate cut will be in October. And what's happening right now is the market and the Fed are both completely data dependent. We have the jobs data this week. We've got inflation data next week. Both of these reports will be heavily scrutinized by the Fed and the market. Add to that, the fears of inflation stoking fiscal policy that we still don't have full color on. As the year develops, we're going to get more color on fiscal policy and I think you could expect more volatility in the bottom market.
And then you have a bunch of Fed speakers that came out this week on the tape and also the FOMC minutes that were released from a December FOMC meeting. And if you read through those minutes and you read the narrative and you hear the narrative from the Fed speakers, many Fed members are sticking to one common theme, that you need to be cautious and careful to your approach in the upcoming quarters. You had Fed Reserve Bank of Philadelphia President Patrick Harker came out, he said the Fed is on track to cut rates this year, but the timing is all data dependent. He pointed out that it's taking longer than expected to bring inflation down to the 2% target, and he reiterated that the Fed is not going to act in haste. And you saw a similar narrative from Fed Reserve Bank of Boston President Susan Collins, who also said slower rate cuts for 2025.
So you add all that together, you add the data that we saw today in the jobs number, and you don't really see a picture where you're going to have this consistent path of rate cuts. And to add to all that, we also had treasury auctions this week. You had $58 billion of a three-year treasury, now, you had 39 billion of a 10 year, you had 22 billion of a 30 year. None of these auctions did very well. Maybe the 30 year did okay, but again, it's showing you that investors are not really particularly comfortable in jumping in at these levels where they think rates can go even higher from where we're right now.
George Mateyo:
Well, Rajeev, I thought it was interesting. Biden alluded to the fact that the Fed actually did have a meeting since we last spoke, and one thing that was kind curious to me was that they felt the need it seemed to talk about what might happen next. And it's kind of a reversal in the sense that in the prior meeting they made a comment that they don't want to speculate. They don't want to front run essentially policy when things are just at the proposal stage, meaning that at some point people are starting to think about, well, what the administration might do in Washington with respect to tariffs. And so when they met, what was it, maybe November, they said, "We're not going to go down that path and wade into the conjecture mode and guess as what might happen." But they kind of reversed course though, didn't they? I mean, I think in December they said, well, there's a few people that said we shouldn't be anticipating more inflation because of tariffs and other things. How do you make sense of that development, that change of tone?
Rajeev Sharma:
I think it's very interesting and if you see the press conference of [inaudible 00:11:34] the last meeting that we had for the FMC, he tried his best to avoid conversations of how about Fed rate cutting philosophy without knowing exactly what the fiscal policy is going to be, but it's very hard to ignore it. Everything you're hearing about fiscal policy leads down a road that could cause inflation to move higher. We still haven't seen the inflation picture get to the point where the Fed is very happy about it. It's trended lower, but it hasn't got to their 2% target. They haven't talked about changing the goalpost either about where their target's going to be. So I think right now the Fed, even though they'll continue to say we're data dependent, they have to be also fiscal policy dependent. And putting that hand in hand, I think anything you hear from the new administration that comes into office that even suggests that inflation could spike, the Fed cannot ignore it, and their narrative's going to reflect that.
George Mateyo:
Steve, we've got our algo coming out next week and we talk a lot about the political, I guess, issues of the day, if you want to call it that. We've talked about the fact that de-relation seems to be coming, which is certainly market friendly. Immigration is kind of a question mark in terms of what it might mean for the economy, but certainly I think the bigger focus, at least in the New York City and the tariffs as I mentioned and Rajeev talked about too, the Fed seems to be focused on that as well. We got a lot of news this week with respect to what might happen in Canada, one of our largest trading partners. What do you make of that and what do you think that the overall situation for tariffs means for the market as we think about starting the year, on an interesting note we'll say at the very least?
Stephen Hoedt:
Yeah, no doubt about the interesting note, George. I mean, when you think about the tariff situation, the impact has already kind of started to happen even without the new administration being officially in office yet because the government of Canada has effectively fallen with the announcement that Trudeau will resign and there's going to be a replacement there. At the end of the day, that's just selecting who's going to run in the next election in Canada, which will likely occur at some point in May. With all the indications being that there's going to be a swing to the right north of the border. Very similar and a populist tone to what we've experienced here in the US. The one thing that it's very clear, aside from the fact that Canada wants to remain Canada and doesn't want to become the 51st state, is that the Canadians will use their energy markets. And the fact that the energy markets are very closely tied together with the US is a way to defend themselves against whatever the incoming administration tries to do.
I live here in Southeast Michigan, and when you come across the border from Ohio and drive to downtown Detroit, you see one of the largest refineries in the Midwest. And that refinery, all the crude oil that goes into that refinery comes from Canada. So when you think about the jobs impact in states like Michigan and others from potentially having a export tax or some kind of tariff put on by the Canadians in retaliatory fashion, on energy exports, in order to defend themselves against say a broad tariff from the United States, you can see very quickly how the economic impacts can kind of cascade. So my belief is that we'll end up seeing some type of a deal between these two countries come together fairly quickly because you're looking at literally the largest trading relationship in the world. It's somewhere between 850 and 900 billion worth of trade goes between these two countries.
Much of it comes across the Ambassador Bridge on the way to the auto companies here in Southeast Michigan. So I truly do not think that you're going to see this persist all that long. But the one thing that's very clear to me, George, is that whether it's Canada or whether it's France or Germany or other places, there are a lot of dominoes that have been falling as a result of political upheaval in many Western countries. And the thing that signals to me is that equity market investor is that we're in an environment where there's a lot more maybe uncertainty than what people had anticipated say six months ago. And when you're staring at an equity market that has significant valuation premiums in it, we think we've argued all along that maybe the valuation premium needed to come down as uncertainty ratcheted up. And it's very clear to me that we've certainly seen uncertainty ratchet up here, and the equity market has not had a great start to this year through the first five trading days.
That's kind of foreshadowed by the fact that Santa Claus didn't make his normal appearance at the corner of Broad and Wall. And when you don't see a Santa Claus rally, that's the market sending you a signal that there's something going on and you need to pay attention to it. So from our perspective, I think we came in with our outlook for 2025 saying that we thought that the first half of 2025 was likely going to be more difficult as we saw the market react to maybe a set of expectations that were too high in terms of earnings. And I definitely think that when you combine that with the fact that uncertainty seems to be ratcheting higher, we've got a recipe for...
I don't want to say that we're going to have to have a correction, but at the end of the day, it's going to be a difficult first half followed by likely a better second half. Because we do see earnings growth at eight to 10% this year, but the consensus right now is still at 15. So you've got a whole bunch of things to try to deal with, and that doesn't even get into the fiscal and the interest rates backing up to 5% and things like that. So it's just a much more difficult market for equities right now than what I think people probably expected a couple months ago.
Brian Pietrangelo:
Hey, Steve, one final question to close the podcast. Any thoughts on maybe what happened in 2024 sector performance as it leads to 2025 bread than anything going on with the Magnificent Seven that's on your mind?
Stephen Hoedt:
I would tell you, Brian, that the Magnificent Seven really caught a bid toward the end of the year, and that caught my attention from the perspective of the market's operating differently than it did when all of us on this call were in our formative years in the market. And that is that when things start to tilt defensive, you used to buy healthcare and consumer staples and utilities and things like that because those were what helped you sleep at night. Now what you see is that when the market starts to go into a period of increased uncertainty, people gravitate toward what they view is the defensive growth names of the Mag Seven. So we've seen the Mag Seven names outperform as the market has had this period of indigestion over the last two, three weeks. And I don't know that I want to say that that's going to continue, but I would tell you that it's certainly has caught my attention because you can see the change in tenor underneath the market.
Now, we still believe that as you go through the course of the year that you want to have a pro-cyclical bias. We see things like the regulatory policy changes benefiting banks. We think that the reshoring kind of things that benefits industrials here, energy and materials are pro-cyclical. And we think that eventually the Chinese will go more all in on their stimulative policies, all that kind of stuff. It argues for pro-cyclical tilt, and that should result in increased breadth in the market, broader participation eventually, and some rotation away from the Mag Seven. But as long as we have this kind of defensive nature where there's a high degree of uncertainty, we expect that you're going to see people gravitate toward those new would be blankets, for lack of a better way of describing them, of the Magnificent Seven names in the tech sector. So more of the same kind of.
Brian Pietrangelo:
Well, thanks for the conversation today, George, Stephen Rajeev, we appreciate your insights and as we start the new year, I'd also like to take time to thank our internal partners for helping us to produce our podcast, including Sarah Faye, Arlen Gray, Quentin Jenkins, Aaron Bechtel, and Zelko Sennin. 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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