Fed rate cut looms
Summary
Inflation came in lighter than expected, and labor market concerns all but guarantee a Fed rate cut. The housing market shows signs of recovery, while the ongoing government shutdown threatens vital programs and federal workers’ paychecks.
The stock market climbed 1.9% last week, reaching a new all-time high on Friday. By last Friday, 29% of companies had reported Q3 results, with the majority beating consensus estimates. Year to date, the S&P 500 has gained 16.7%. Meanwhile, the 10-year U.S. Treasury yield remained steady, closing the week unchanged at 4.02%.
Softer than expected inflation solidifies a 25 bps rate cut
Following the White House’s recall of some workers, the September CPI report showed that annualized inflation rose to 3.0%, up from 2.9% in August and slightly lower than the 3.1% increase forecast by economists. The softer-than-expected forecast report gives the Fed a clearer path to cut rates as a weakening job market becomes a higher priority than inflation. The market continues to expect a 25 bps rate cut in next week’s FOMC meeting as well as the December meeting.
Interest rates and home sales
The mortgage market is both the driver of a recent surge in home prices and the reason the market was slow to begin with. Home sales rose in September to a seven-month high of 4.1 million, signaling a potential recovery in the housing market. The driver of the surge in home sales was a decline in the average 30-year fixed rate, which fell to 6.19%, its lowest in over a year. However, many homeowners that purchased or refinanced homes before 2022 locked in interest rates around 3%, roughly half of the current mortgage rate. Buyers are optimistic about potential Fed rate cuts, yet remain concerned about economic conditions, inflation, and employment.
Shutdown update
November 1 is widely regarded as an important date in the context of resolving the government shutdown. President Trump is scheduled to return from his Asia trip on Thursday, October 30. Additionally, according to the USDA, SNAP (food stamp) benefits for approximately 42 million Americans will not be distributed on November 1. The ACA open enrollment period also commences on November 1, with premiums anticipated to increase substantially in the absence of subsidies. While many federal employees missed their first full paycheck last week, additional employees, including air traffic controllers, are expected to remain unpaid this week unless decisive action is taken. Military employees are scheduled to receive their upcoming paychecks after the Defense Department received a $130 million donation designated for that purpose.
The week ahead
All eyes will be on the Fed this week as it is widely expected to cut rates by 25 bps to a trading range of 3.75%-4.00%. Focus will also be on the Fed’s comments for signals on both the timing and extent of future rate cuts. Earnings season continues with 29% of S&P 500 companies reporting, including five Magnificent Seven stocks Microsoft, Meta, Alphabet, Apple, and Amazon.
U.S. Treasuries
U.S. Treasuries indicate yields for on-the-run U.S. Treasury bills, notes, and bonds, which are typically the most recently auctioned and most liquid issue with a maturity closest to the stated tenor. These are commonly used for pricing fixed-rate debt at origination and for calculating yield maintenance.
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SONIA
SONIA is the Sterling Overnight Index Average. It is published each London business day by the Bank of England and measures the cost of overnight, unsecured borrowing. Daily SONIA fixings are compounded to calculate an overall floating rate for an interest period. Compounded SONIA fixings provided by Chatham reflect the backward-looking rate for the designated tenors.
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Disclaimers
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