Nobody expected the Federal Reserve to do much of anything at today’s FOMC, other than perhaps providing updated guidance as to when we get that first rate cut. Where a couple of months ago, Fed officials were still alluding to a possible one or two moves in the summer, the policy statement today talks to continued resilience in the U.S. economy, low unemployment and a disappointing pause in the trend toward 2% inflation. In so doing, the Fed has simply caught up with where market consensus has shifted to in recent weeks, that we may only get one drop in the fed funds target this year and that will be out in the fourth quarter.

 

I can’t overstate how large of a sea-change this has been. Back at the start of the year, investors were thinking that the Fed would start backing off its restrictive policy stance as early as March, yet here we are four months later with as close to a 180 as you can get. Yet, as much as the meeting outcome looks hawkish, market participants anticipated this and that is why we didn’t see a negative shift in equity sentiment. In fact, the major indices rose on the headlines and bonds also improved.

 

 

This might seem a little peculiar given that higher rates for longer doesn’t exactly sound positive for stocks, nor for fixed income.  What is happening is that equity investors are focusing in on how strong the economy has remained, despite higher rates, and the improvement in earnings. Bond investors believe that higher for longer ultimately means victory on inflation, meaning that rates do head down in 2025. What is interesting is that economic data in recent days suggest that the economic cool-off is already here. U.S. consumer confidence for April came in 5 points below consensus, the April ISM manufacturing index dropped back below the break-even 50 level and construction spending fell 0.2% in March. The main focus now is the April payrolls data on Friday.

 

We believe that the cracks that we are seeing in the U.S. economy will continue and allow the decline in inflation to resume into the summer. That may not happen in time for the Fed to deliver cuts in the third quarter, but it might allow for a more dovish tone to return to official rhetoric. That would be constructive for both equities and fixed income, at least until we get closer to the U.S. presidential election.

 

On behalf of the Pyle Wealth Advisory team, have a wonderful rest of the week.   

Andrew Pyle

 

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Andrew Pyle is an Investment Advisor with CIBC Wood Gundy in Peterborough. Andrew and his clients may own securities mentioned in this column. The views of Andrew Pyle do not necessarily reflect those of CIBC World Markets Inc.

 

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