Fed Rhetoric Spooks The Markets Yet Technology Stocks Move Higher

Welcome back readers. Hope you were able to take advantage of some of the stock market’s tech stock strength this past week.

We want to extend our sincere wishes for an enjoyable Memorial Day holiday. Personally, through the years I have had the privilege of knowing several families that have had (or currently have) loved ones serving in the military.  It is important to all of us at MarketGauge to thank any of our readers who either served or have family who have served.  And if you know someone who may have had the terrible misfortunate of losing a soldier, please reach out to them and extend our heartfelt appreciation to their family for their service.  Here is a little prayer to capture this important remembrance:

“Almighty God, let us pause to pay tribute to our dearly departed.  Let us honor the memory of the valiant servicemen and women who made the supreme sacrifice so that we may live in a country that is free.  May they rest in peace.  Keep their families in your good graces. 

Higher for longer

Both Mish (through Mish’s Daily, you can subscribe in the link here) and myself have held consistent views since late last year that we thought interest rates would stay elevated for longer.  As this writer has been suggesting in the past few Market Outlooks (click here for last week’s Market Outlook) volatility would pick up from continuing economic uncertainty.  Contrarian economic signals (both positive and negative) are weighing heavily on interest rates and that in turn, is producing added doubt and volatility.

I must admit that I took my cue more from Mish’s insistence that inflationary cycles don’t go down easily, and that inflation would likely stay elevated longer than everyone was expecting.  Especially with a growing and robust, mostly fully employed, economy.  For inflation to decline the economy needs to slow dramatically and we have not seen enough of those signs to believe that is happening.  More importantly, in an election year, the current administration is going to do all they can to keep the economy chugging along.

Most investors (and economists) have been operating on the rhetoric put out by the Federal Reserve last November that suggested we could see as many as 7 rate cuts.  Of course, their narrative is that it will always be data dependent.  Since the beginning of 2024 the data, especially with regard to inflation, has not been supportive of any rate cuts.

Inflation readings are way above expectations, and parts of the economy, such as unemployment claims, consumer sentiment readings, retail sales, Michigan PMI, and a host of other data points, are just not trending down enough to contribute to a “slowing” narrative. 

Yes, we have seen inflation, both at the producer and consumer price levels, heading down with the right trajectory, but clearly not anywhere even close to the Fed’s target rate.

More negative inflation information came out this past week

The Federal Reserve policymakers said on Tuesday that the U.S. Central Bank should wait several more months to ensure that inflation really is back on track toward its 2% target before cutting interest rates. 

On Wednesday, Goldman Sachs CEO David Solomon said he does not expect the Federal Reserve to cut interest rates this year.  “I’m still at zero cuts” Solomon said at a Boston College event.  “I think we’re set up for stickier inflation.”  (I am wondering if he heard Mish in the past 6 months when she appeared on her national TV interviews? Maybe Mr. Solomon watches Charles Payne?). 

If you would like to see a replay of any of Mish’s television and podcast appearances, go here.   

Solomon’s comments stand in contrast to market expectations for at least one rate cut by the Fed this year.  Traders reduced bets on Wednesday for more than one rate cut this year after the release of the Federal Reserve’s April 30 – May 1 policy meeting minutes showed that rate-setters thought inflation could take longer to ease than previously thought. 

Solomon told an audience of about 150 senior corporate executives and Boston College students that while he believes the U.S. economy is fundamentally strong, not all Americans are experiencing growth or the impact of inflation the same way.

Solomon said, “inflation is not just nominal, it’s cumulative.”  He cited a conversation that he had recently with the CEO of a grocery chain that has seen customers cutting back on the size of their purchases in response to rising prices.   “We’re starting to see the average American slowing down and changing his habits”, Solomon added.

Interest rates are running the show

The Federal Reserve comments and the release of the minutes sent interest rates up and stocks down as the market was hit especially hard on Thursday giving up any gains made earlier in the week. Notice the steep climb higher from Wednesday to Thursday on the 10-year Treasury rates (see below).