Perceived Safety

• The S&P 500 rose by 0.3%, and the Dow Jones gained 0.1%, both achieving fresh record highs on Monday after last week's rally prompted by the Fed's first rate cut in four years, set at 50 basis points.

• The Nasdaq also edged up by 0.1%.

• Fed officials, including Raphael Bostic, Neel Kashkari, and Austan Goolsbee, expressed support for the recent cut and indicated a preference for additional rate reductions in the upcoming months.

• Among stocks, shares of Intel jumped 3.4% following reports of potential multibillion-dollar investments from Apollo Global Management.

• Tesla climbed 4.9% as investors look forward to the much-anticipated robotaxi launch and the upcoming third-quarter sales figures.

Remember, Jerome Powell told us last week precisely what signal he wants the market to take from the Fed's rate cut.

He said, they don't think they are behind the curve, and that the Fed's "strong move" should be taken "as a sign of [their] commitment not to get behind the curve."

Shortly thereafter, the governor of the Bank of Japan said the uncertainty around the U.S. economy is the reason for unstable markets. He said while soft landing in the U.S. economy remains the base case, "the data since early August has been weak, so risks have heightened somewhat."

Keep this all in mind as we consider the comments made by a lineup of Fed speakers since last week's meeting.

On Friday, Fed Governor Waller said he would support "big rate cuts" if needed. If the labour market worsens or inflation data softens quicker, he said he's fine moving in 50s to get to "where they want to go."

"Where they want to go," would be the neutral rate, which is much, much lower.

So, that makes "soft inflation" a condition for him. And not so coincidentally, he added that he sees inflation coming in soft for August, based on the inputs from the recent PPI and CPI.

Atlanta Fed President Bostic had commentary focused on the labour market.  He says, "if the labour market deteriorates, that is a reason for a faster pace to neutral."

Chicago Fed President Goolsbee said this: "Keeping rates at decade-high does not make sense when you want things to stay where they are."

That implies they want things to stay here (2%ish growth, 4.2% unemployment, and very near target on inflation). If that's the case, the "neutral rate" is where you want to be, to neither stimulate nor restrict economic activity. And he added, "we are 100s of basis points above the neutral rate." 

So, from this commentary (including the Bank of Japan) we can deduce that both the unemployment rate and the (soft) inflation rate sit on thresholds that, if breached, would prompt an aggressive reaction from the Fed.

This all sounds like a Fed that knows they are behind the curve. They held rates too high, for too long, which has put the economy in a vulnerable position — though they don't want to admit it publicly.

And if we take Powell's guide on this Friday's PCE report, it should come in at 2.2%. That would be a drop from the July reading of 2.5%. And that means, by holding rates steady in July (for the twelfth consecutive month), the Fed actually got 30 basis points tighter (more restrictive) in the month of August (i.e. as inflation falls and the Fed Funds rate stays steady, the "real interest rate" moves higher/policy gets tighter).

With that, they only accomplished maybe 20 basis points of actual easing out of their policy decision last week.

What we do know from all of this is that the Fed wants us to believe, unequivocally, that they are on high alert to protect the economy.

That should serve as a perceived safety net for hiring and investing.

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GRYNING | Signals

All strategies gained last week, except for the [LS]. The [SR] strategy gained the most, +1.9%. The [MR] strategy’s weekly performance matched that of the S&P 500 index, up 1.4%, but with only three positions, thanks to a large gain in NKE. This is the best-performing strategy year-to-date with a gain of 26.3%.

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I believe that it is highly unlikely that forecasts based on fundamentals generate a positive expectation over the long term. Strategies do not guarantee success and can fail, but a suitably designed ensemble offers better odds of generating reasonable risk-adjusted returns over time before any leverage.