WEEKLY | FED: WILL IT CHANGE ITS SPEECH?
Your weekly summary with the most important news for your investments.
The previous week saw a before and after that was marked by another steep drop by the technology sector that was partially reversed once Q2 economic growth (+2.8%) and PCE inflation (2.5% from 2. 6%) and core PCE inflation (2.6% unchanged), leading the market to assign a high probability that the Federal Reserve (FED) will change its discourse starting this Wednesday, indicating that there is more confidence to lower the monetary policy rate (currently at 5.5%) for the remainder of the year.
At the same time, with much of the Democratic Party's support behind the nomination of Kamala Harris for the presidency and political polls closing the gap with candidate Donald Trump, it would appear that political risk has subsided. This translated into a weekly stock market rise in the Dow index (+0.7%) followed by declines in the S&P 500 (-0.8%) and Nasdaq (-2.1%) indices. Even so, these three stock indexes have accumulated year-to-date gains of +7.7%, +14.5% and 15.6%, respectively, where the main shares of the technology sector are estimated to have lost around -12% in recent weeks as the recomposition of investment portfolios takes shape. Apple, for example, has accumulated a -7.2% mismatch since reaching its all-time high price on July 16.
In the fixed income market, the 10-year sovereign rate eased to 4.2%, however, sovereign rates up to six months remain all above 5% even though the market estimates that the instance rate could fall by up to 70 basis points before the end of the year, a topic that we will address in greater detail below.
This week we will not only be paying attention to the comments to be made by Fed Chairman Jerome Powell after the monetary policy meeting to be held between tomorrow and Wednesday, but also to the employment data for the month of July. For now, it is estimated that the economy would have generated 180 thousand new jobs, the unemployment rate marginally falls to 4% (from 4.1%) and wage inflation marginally falls to 3.8% (from 3.9%), the latter figure being the most relevant for the disinflation process expected by the issuing institute.
On the corporate front, technology companies Amazon, AMD, Apple, Arm, Meta and Microsoft will be reporting, along with others such as Carnival, Chevron, Exxon, McDonald's, P&G and Starbucks, among many others. The market will be waiting to determine whether the results of the technological companies support the market valuation or whether they still have to continue to be out of line with the valuation that many of them had achieved during the first half of the year.
On the political front, we will see the outcome of the Venezuelan election results, where President Nicolás Maduro reported that he would have won a second term for another six years, even though the opposition has questioned the results, accusing the government of electoral fraud. All this while the world is marveling at the Olympic Games in France for the next two weeks despite the convulsive start that came hand in hand with organized fires in the country's train systems.
There is no doubt that on Wednesday afternoon market participants will be looking for signs in Powell's remarks that the Fed has turned the page and will now be focused on reducing the policy rate to avoid a sharper than expected economic downturn. However, the market's expectation of a 70 basis point rate cut for the remainder of the year may be too premature simply because the economy continues to run faster than expected and wage inflation continues to run above 3.5% year-over-year.
Some will claim that the recent drop in the price of oil, as measured by WTI, close to US$76 a barrel along with gasoline price futures as the northern summer draws to a close, will translate into lower overall inflationary pressures. Indeed, they may be right because the price of oil at these levels is already almost -5% below those recorded 12 months ago. In addition, corn and wheat prices are almost -23% lower than they were at this time last year, generating disinflationary pressures as well. However, there is one element that the market is leaving aside as if it were irrelevant, and that is that the issuing institution will avoid interfering in the political spectrum, where candidate Trump has been arguing that lowering the monetary instance rate without a clear and concrete decrease in inflation would be political interventionism in favor of the government.
This would detract from the Fed's independence in an environment where headline inflation remains high and progress towards the 2% target is quite sticky and the economy continues to expand more than expected. The Fed will likely wait until the economic symposium in Jackson Hole, Wyoming on August 22-24 to change the speech to “Reassessing the Effectiveness and Transmission of Monetary Policy”. At that time, the Fed will have the inflation reading for the month of July, which could hint that changes in the monetary policy rate will be forthcoming; however, with six-month rates above 5%, it is difficult to foresee that there will be a more drastic change entering the final stretch of the year.
On the corporate side, Alphabet's results came in above expectations even though revenues from YouTube were lower than expected given the competition from other social content platforms. Meanwhile, Tesla's quarterly results came in below expectations, dragging down its share price by almost -5% even though sales exceeded US$25 billion. Finally, after a long run, Southwest Airlines announced that it will be ending its commercial strategy of not assigning seats and start charging for the service. Meanwhile, Pershing Square, which was initially expected to raise at least US$20 billion through an initial placement, decided to postpone this process until further notice.
In conclusion, this week everything will revolve around the Fed's speech after its monetary policy meeting, where it seems premature that it will change its guidelines, indicating that it still needs more confidence on the inflationary front to begin a possible cycle of lowering the monetary policy rate.
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