Podcast Summary
Fed's Interest Rate Decision: The Fed's decision on interest rate cuts in September will depend on the August jobs report, with some members advocating for a 25 basis point cut and others considering a 50 basis point cut based on the labor market's current state. The risks to the economy are skewed towards employment, and Powell's perspective may influence the decision.
The Federal Reserve's decision on interest rate cuts in September will be heavily influenced by the August non-farm payrolls report. According to Michael McKee and Anna Wong, who were interviewed on Bloomberg Daybreak, there is a split within the Federal Open Market Committee regarding the current state of the labor market. While some members, like Mary Daly, believe it is in balance and are pushing for a 25 basis point cut, others, including Chairman Powell, see it as still tilted towards the downside and are considering a 50 basis point cut. The August jobs report will provide crucial data to inform this decision. Additionally, both McKee and Wong agree that the risks to the economy are currently skewed towards employment, and Powell's more holistic perspective on the labor market may influence the Fed's decision.
Job market trends: Despite recent job market data indicating weakness, it's unclear if this is a temporary or permanent shift due to the expiration of pandemic-related stimulus measures and revisions to previous employment data.
The recent job market data, including the lower-than-expected job creation number and the increase in the unemployment rate, may not be as dire as it seems at first glance. However, there are concerns that some of these trends could persist, particularly in the education sector due to the expiration of pandemic-related stimulus measures. The Fed will be closely watching upcoming job reports to determine if these trends continue or if there is a bounce back. The revisions to previous employment data also add uncertainty to the current labor market situation. Overall, the job market is showing signs of weakness, but it remains to be seen if this is a temporary or permanent shift.
Fed's rate cut cycle: The Fed is expected to start a rate cut cycle due to economic slowdown, but may not be able to reassure investors unless there's a strong jobs report or decrease in inflation. If the Fed only cuts rates by 25 basis points, it may lead to deeper cuts later due to the cooling labor market.
The Federal Reserve (Fed) is currently behind the curve in addressing the economic slowdown, and it's expected to kick off a rate cut cycle later this month. According to economists, the Fed is approximately 70 basis points behind the curve. However, the Fed may not be able to reassure investors that it's on top of the situation unless there's a reasonably strong jobs report or a decrease in inflation. If the Fed only cuts rates by 25 basis points, it would still be behind the curve, potentially leading to deeper cuts down the line due to the cooling labor market. To defend their position, the Fed might highlight the overall economy's growth and the low jobless claims. However, if the upcoming CPI report shows a significant increase in inflation, it could potentially derail the Fed's plans for rate cuts. Additionally, retailers' excess inventory and holiday discounts could lead to more disinflation in the fall. The outcome of these factors will significantly impact the Fed's decision-making process.
Bitcoin as indicator for digital currency market: Bitcoin's volatility and potential decline could signal broader trend for digital currency market as a whole, with potential impact from S&P 500, VIX, and Fed rate cuts.
Bitcoin's volatility and potential for further decline could indicate a broader trend for the entire digital currency market. Mike McGlone, senior commodity strategist at Bloomberg Intelligence, suggests that Bitcoin's rapid rise and high volatility make it a significant indicator for the space as a whole. With the S&P 500 versus Bitcoin ratio dropping significantly since the peak in 2021, and the VIX volatility index starting to show signs of a potential reversal, McGlone believes that the "fastest horse in the race" might be tilting lower. Additionally, the expensive stock market and potential for a Federal Reserve rate cut cycle could further impact digital currencies. If Bitcoin continues to decline, it could drag down other highly speculative digital assets, making it a critical benchmark to watch.
Bitcoin vs Gold: Bitcoin's extreme volatility makes it less attractive as a hedge against economic downturns compared to gold, but its limited supply and increasing demand may make it a reliable alternative in the long term after reducing volatility
While gold is currently seen as a safe-haven asset during economic uncertainty and potential recession, Bitcoin, as the digital version of gold, is still considered too volatile and speculative to be a reliable hedge against inflation or economic downturns. Mike McGlone, senior commodity strategist at Bloomberg Intelligence, believes that Bitcoin's extreme volatility makes it less attractive compared to gold during times of market instability. McGlone also suggests that Bitcoin may experience a 50% correction from its current highs, potentially dropping to around $35,000. However, in the long term, McGlone remains bullish on Bitcoin due to its limited supply and increasing demand and adoption. But for Bitcoin to become a more reliable alternative to gold, it needs to exhibit less volatility and become a more stable asset.
China's impact on commodities: China's economic conditions and stock market influence commodity prices, particularly copper and Bitcoin, with deflationary forces and speculative bubbles impacting their prices. Investors should consider these factors when making commodity investments.
The performance of certain commodities, such as copper and Bitcoin, is closely linked to the stock market and economic conditions in China. When the stock market experiences a significant correction and China's economy is in decline, these commodities typically see downward momentum. For example, copper, which reached a new high of $5.20 a pound earlier this year, is now around $4.20 a pound due to deflationary forces in China and a speculative bubble in the commodity market. The US stock market's performance and China's economic turnaround are key factors for copper to continue its upward trend. However, many investors may be underestimating these deflationary forces, which could lead to further price drops in commodities. The high price queue, or the idea that prices get too high and create incentives to bring in more supply and reduce demand, is a significant factor driving down commodity prices. Ultimately, the outlook for commodities depends on the US stock market's ability to outweigh the challenges in the world's second-largest economy.
Oil prices rebound: Historical trends suggest oil prices will rebound despite geopolitical volatility and excess supply, but current supply surplus has increased due to Russia's invasion of Ukraine, and earnings growth in 2025 may face challenges
Despite geopolitical volatility and excess supply in the oil market, crude oil prices are expected to rebound due to historical trends following political events. The normal low price for crude oil, according to Mike McGlone of Bloomberg Intelligence, is around $40 per barrel. The current surplus of supply and demand in the US and Canada is also contributing to the downward pressure on oil prices, but this surplus has significantly increased since Russia's invasion of Ukraine. In the stock market, earning season has come in better than expected, but companies are facing challenges with pricing power and potential discounting. This is good news for the Fed and bond markets, but it raises questions about the sustainability of earnings growth in 2025. The tech sector, which is expected to see an acceleration in earnings in 2025, showed resilience after Nvidia's less-than-expected report, indicating that the sector may be able to weather earnings disappointments. Overall, the market outlook remains positive, but investors should keep a close eye on the potential challenges facing the oil market and earnings growth in 2025.
Earnings growth, Fed's decision, labor market: Earnings growth may decelerate for some companies in 2023, the economy and labor market will significantly impact earnings and market health in 2025, the Fed's interest rate decisions could lead to market recovery or a weaker growth environment, and careful monitoring of labor market and Fed's response is crucial for investors in 2025
While earnings are expected to grow significantly in 2023, the trend for some companies, including tech giants like Nvidia, may be decelerating. The economy and labor market will play a significant role in earnings growth and the overall health of the market in 2025. The Federal Reserve's decision to cut interest rates could impact the stock market, with a few cuts potentially leading to market recovery, but deeper cuts implying a weaker growth environment. The direction of the labor market and the Fed's response to it will be crucial factors to watch as we head into 2025. If the Fed begins a rate cutting cycle, there could be a shift in market leadership away from tech and towards other sectors. The upcoming jobs report will provide important insights into the labor market and the Fed's decision-making process. Overall, the economic and earnings landscape of 2025 is uncertain, and careful monitoring of key indicators will be essential for investors.
Market Shift: The market is shifting from tech to rate-sensitive areas and defensive sectors, indicating growing concerns and a risk-off tone. Tech, which makes up 30% of the S&P 500, must perform well for the index to continue making new highs. The election is a major catalyst for the end of the year, with policy priorities on taxes, immigration, and tariffs being closely watched.
The market leadership is shifting from tech to rate-sensitive areas like REITs and defensive sectors such as utilities and staples. This could be a sign of growing concerns and a risk-off tone in the market. For the overall market outlook, tech, which makes up about 30% of the S&P 500, must perform well for the index to continue making new highs. Looking ahead to the end of the year, the election is a major catalyst, and investors are hoping for more clarity on policy priorities, particularly regarding taxes, immigration, and tariffs. The application of AI is a potential investment theme for 2025, but the real test will be whether there is a return on investment for those implementing AI technologies.
AI's impact on S&P 500 profits: AI's performance and its effect on S&P 500's profit targets could influence stock prices. Preparing for potential growth fears, investors may consider extending duration and securing lower yields through bonds for portfolio diversification and stability.
The role of Artificial Intelligence (AI) in meeting the S&P 500's margin targets is a significant factor to watch, as its impact on profits could influence stock prices. However, if AI underperforms or takes longer to deliver, it could lead to disappointment. Furthermore, if we enter a rate cut cycle, there could be a correlation between bond yields and stock prices, making bonds an essential part of portfolio diversification. With the potential for growth fears and downside risks, bonds could provide stability as yields increase. Therefore, investors may consider extending duration and securing lower yields to prepare for potential growth scares. Additionally, Bloomberg Radio will be moving to 92-9 FM in Boston starting September 3rd. Stay tuned for more insights and top stories on Bloomberg Radio.