July 13, 2024 Market Update

Thursday’s cooling inflation news initiated a rotation from large cap tech companies to small cap firms.  The Russell 2000 Index ETF (RUT) was up 3.6% on Thursday alone, while the Technology Select Sector SPDR Fund declined by 2.5%.  But the shift in momentum did not prevent all four major stock indexes from finishing the week in the green, with the Russell soaring by 6% for the week.

The bond markets also saw plenty of volatility this past week.  After posting modest gains earlier in the week, the 10-year treasury yields dropped roughly 9 bps on Thursday’s news.  The drop in yields allowed the Vanguard Total Bond Market ETF (BND), a proxy for investment-grade corporate and government fixed-income securities, to edge up for a second straight week.

Fed Chairman Jerome Powell informed Congress last week that the Federal Reserve decided to leave the federal funds rate at 5.25%-5.50%, marking the seventh consecutive time the Open Market Committee has met without a change.

As part of his twice-yearly report on the state of the economy, Powell acknowledged that economic activity has slowed and the labor market is no longer a source of inflationary pressures.  Nonetheless, he made clear that the Fed would not consider reducing its policy rate until it is convinced that the inflation rate is destined to return to its 2% target.  

The Chairman also reiterated the Fed’s previously announced plans to slow the pace of its balance sheet runoff, as part of its efforts to achieve a "soft landing".  It is almost as if the landing strip is in sight, but the control tower has not yet given permission to land the plane.

With a November 5th presidential election looming and just two scheduled Fed meetings before it, political considerations were evident in the questions that were posed by legislators who were present at the hearing.  Democrats expressed concerns about potential job losses if the Fed waited too long to cut rates.  Republicans raised questions about the potential economic harm that could result if inflation were reignited because the central bank started cutting rates too soon. 

These differing perspectives underscore the difficult position the Fed is in as it strives to promote economic stability while remaining politically impartial.  “I’m not going to be sending any signals about the timing of future actions,” Powell told Congress.  “The job is not done on inflation; we have more work to do there.  But at the same time, we need to be mindful of where the labor market is,” Powell said.

Later in the week, the Labor Department revealed inflation rate fell to 3% in June, the lowest it has been since June 2023.  Housing inflation finally showed signs of cooling and consumer price increases were modest across a range of categories, increasing the odds that the Fed will cut rates in September.

That’s all for now.  Have a great weekend and invest wisely my friends.