Weekly Update 09/20/2024: Fed Cuts Rates by a Half Point to Support US Economy

Microsoft announces 10% dividend increase and $60 billion share buyback
General Mills releases earnings beating both profit and revenue expectations while affirming fiscal 2025 guidance
CACI International announces acquisition of Azure Summit Technology; CACI also announces contract win of $273 million to continue providing intelligence expertise to the United States Central Command (USCENTCOM)
Accenture wins $190 million US Department of State contract
Pfizer announces two positive study results from cancer treatment drugs

Domestic Economic News

US retail sales unexpectedly rose in August, supported by online purchases that masked more mixed results at other merchants. The value of retail purchases, unadjusted for inflation, increased 0.1% after a revised 1.1% gain in July, Commerce Department data showed Tuesday. Excluding autos and gasoline stations, sales advanced for a fourth month. Five of the report’s 13 categories posted increases, while others such as electronics and appliances, clothing and furniture fell. Receipts at gasoline service stations decreased, reflecting cheaper prices at the pump. The retail sales report showed so-called control-group sales — which are used to calculate gross domestic product — rose 0.3% in August. The measure excludes food services, auto dealers, building materials stores and gasoline stations. The figures indicate resilient household demand midway through the third quarter even as hiring and wage growth show signs of moderating. For Federal Reserve policymakers, the data also illustrate an economy on solid footing as they debated how much to lower interest rates on Wednesday. In addition to cooler job growth, economists forecast that the combination of elevated borrowing costs, the depletion of pandemic savings and a higher cost of living will eventually prompt American consumers to cut back.

US housing starts bounced back in August after tumbling a month earlier, illustrating uneven residential construction as builders weigh inventory levels against brighter demand prospects tied to falling borrowing costs. Beginning home construction increased 9.6% last month to a 1.36 million annualized rate, the fastest since April, according to government figures released Wednesday. The median estimate of economists surveyed by Bloomberg called for a 1.32 million rate. The report showed overall building permits, a gauge of future construction, rose 5% to a 1.48 million annualized rate, while single-family authorizations increased to a four-month high. New construction of single-family homes increased nearly 16% to an annualized 992,000 pace, the first monthly advance since February. Starts of multifamily projects declined for the first time since May. Builders are awaiting a sustained pickup in demand to help work down an inventory of unsold homes that’s hovering near the highest level since 2008. At the same time, mortgage rates have fallen to the lowest level since 2022 on expectations the Federal Reserve will ease monetary policy. That’s seen as underpinning sales and helping to chip away at inventory. Still, it will take time to deliver consistent increases in residential construction. While homebuilding contributed to economic growth in the second half of 2023 and the start of this year, it’s seen reducing third-quarter gross domestic product by 0.3 percentage point, the Atlanta Fed’s GDPNow forecast showed before the latest starts data. Starts jumped 15.5% in the South, a month after Hurricane Beryl led to the slowest pace of construction in the region since mid-2020. Homebuilding in August also rose in the Midwest and West. Here’s what Bloomberg Economics said about the report: “We think the elevated stock of new homes for sale will keep homebuilders cautious in the near term, leaving housing starts on a declining trend. The interest-rate pivot from the Fed could reinvigorate construction activity, but we only expect a sustained march higher after affordability improves.” — Stuart Paul, economist

Sales of existing US homes fell in August to a 10-month low on persistent affordability challenges ahead of a recent decline in mortgage rates. Contract closings decreased 2.5% from a month earlier to a 3.86 million annualized rate, according to figures released Thursday from the National Association of Realtors. That was weaker than the median forecast in a Bloomberg survey of economists. The housing industry is counting on a series of interest- rate cuts by Federal Reserve — which started Wednesday with a larger-than-typical 50-basis-point reduction — to revive demand. Cheaper home-financing costs would be particularly welcomed by first-time buyers, who made up a record-low share of August purchases, according to the NAR. “Home sales were disappointing again in August, but the recent development of lower mortgage rates coupled with increasing inventory is a powerful combination that will provide the environment for sales to move higher in future months,” NAR chief economist Lawrence Yun said in a statement. Mortgage rates declined last week to the lowest level since September 2022, stoking an influx of applications for home purchases and refinancing, according to the Mortgage Bankers Association. Resale inventory rose for an eighth straight month in August, with the supply of existing homes rising 0.7% to 1.35 million. That’s still the highest since October 2020. Even so, that’s well below the 1.9 million average in the five years prior to the pandemic. At the current sales rate, that represents a 4.2 month's supply. The median sales price, meantime, increased 3.1% in the year through August, to $416,700. That was the highest for any August in NAR data. Over the past year, existing-home sales have averaged a 4 million annualized pace, much slower than the 5.3 million rate in the year prior to the pandemic. A lack of inventory had been a notable headwind, with many would-be sellers unwilling to put their homes on the market and give up their sub-3% mortgage rates. This so-called lock-in effect has reduced sales by about a million homes a year, Yun has said. After the Fed’s rate decision Wednesday, Chair Jerome Powell described the housing market as “frozen” because of the lock-in effect. Lower mortgage rates will encourage people to move, but the continued shortage of housing — which is the “real issue” — is not something the Fed can really fix, he said. Yun suggested the recent declines in borrowing costs indicate homeowners with a $2,000 monthly mortgage payment could afford a house that costs $50,000 more. In August, NAR’s figures showed 60% of homes sold were on the market for less than a month, compared with 62% in July. And 20% sold above the list price, compared with 24% a month earlier. Properties remained on the market for 26 days on average last month, compared with 24 days in July. Existing-home sales account for the majority of the US total and are calculated when a contract closes.

Applications for US unemployment benefits fell to the lowest level since May, indicating the job market remains healthy despite a slowdown in hiring. Initial claims decreased by 12,000 to 219,000 in the week ended Sept. 14, according to Labor Department data released Thursday. That was below all estimates in a Bloomberg survey of economists. The period also corresponds with the so-called reference week when the survey is conducted for the September employment report. Continuing claims, a proxy for the number of people receiving benefits, also dropped in the previous week, to the lowest in three months. The four-week moving average, a metric that helps smooth out volatility in the data, fell to 227,500, the lowest since June. Here is what Bloomberg Economics had to say about the report: “Initial jobless claims declined more than expected in the survey week for September’s employment report, due in part to difficulty adjusting the data around a major holiday like Labor Day. Claims tend to be depressed in holiday-shortened weeks, then rebound the following week — so the current data have limited value as a guide to September’s payroll print.” — Eliza Winger

Interest Rate Insight and the Fed

The Federal Reserve lowered its benchmark interest rate by a half percentage point Wednesday, in an aggressive start to a policy shift aimed at bolstering the US labor market. Projections released following their two-day meeting showed a narrow majority, 10 of 19 officials, favored lowering rates by at least an additional half-point over their two remaining 2024 meetings. The Federal Open Market Committee voted 11 to 1 to lower the federal funds rate to a range of 4.75% to 5%, after holding it for more than a year at its highest level in two decades. Wednesday’s decisive move highlights the growing concern among policymakers over the employment landscape. “The committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance,” the Fed said in a statement, adding that officials are “strongly committed to supporting maximum employment” in addition to bringing inflation back to their goal. The S&P 500 index rose while Treasury yields and the Bloomberg Dollar Index fell immediately after the release. Policymakers penciled in an additional percentage point of cuts in 2025, according to their median forecast. Governor Michelle Bowman dissented in favor of a smaller, quarter-point cut, the first dissent by a governor since 2005, and the first dissent from any member of the FOMC since 2022. In their statement, policymakers said they will consider “additional adjustments” to rates based on “incoming data, the evolving outlook and the balance of risks.” They also noted that inflation “remains somewhat elevated” and job gains have slowed.

Officials updated quarterly economic forecasts, raising their median projection for unemployment at the end of 2024 to 4.4% from 4% forecast in June. That would represent a small deterioration from the current level of 4.2%. Powell said last month that further cooling in the labor market would be “unwelcome.” The median forecast for inflation at the end of 2024 declined to 2.3%, while the median projection for economic growth ticked down to 2%. Policymakers still don’t see inflation returning to their 2% target until 2026. Officials again raised their projection for the long-run federal funds rate to 2.9% from 2.8%. Wednesday’s decision begins a new chapter for the Fed, which started lifting borrowing costs in early 2022 to curb a pandemic-driven surge in prices. Inflation, fanned by supply-chain disruptions and a wave of demand from locked-down consumers, ultimately climbed to its highest level since 1981. The central bank raised rates 11 times, bringing its benchmark to a two-decade high in July 2023. Since then, inflation has cooled considerably and — at 2.5% — is nearing the Fed’s 2% target. And while the labor market has weakened, there’s no clear indication the US economy is in recession or on the cusp of falling into one. Layoffs remain low, consumers are still spending and economic growth is strong. Still, there are growing signs of strain. Excess savings that helped support Americans in recent years have run dry, and delinquency rates are rising. An increase in job losses could trigger a pullback in spending and slow the economy. The muddied economic picture has increased uncertainty and spurred divisions among Fed officials over the best path forward for policy. Some are anxious to curb labor-market weakness before it spirals into more pain. Others worry that cutting rates too quickly may reignite demand and keep inflation elevated. At the end of the day Wednesday after Powell’s presser stocks moved into negative territory, giving up earlier gains, and the yield curve steepened. The two year Treasury rose 2 bps to 3.63% while the Ten-year Treasury rose 6 bps to 3.71%. Jerome Powell said the Federal Reserve is not in a rush to ease after cutting rates by a half-point. With the yield curve steepening, it ended up pushing mortgage rates higher because the view is that the larger rate cut is more stimulative to the economy long-term. We at SGK were actually neutral on whether they cut 25 or 50 bps given the forward path is quite clear. Powell cautioned against assuming the half-point move set a pace that policymakers would continue. We witnessed a nice rebound in the equity averages in Thursday trading after traders had a night to digest the Fed move.

Impactful International News

In unfortunate economic news from overseas, investor confidence in Germany’s economy plunged to its lowest level in almost a year after further signs that the country’s manufacturing giants face an increasingly uncertain future. The surprisingly quick deterioration in sentiment is the latest evidence of a souring outlook, arriving just after Intel Corp. said it plans to postpone a planned factory by about two years. The ZEW institute’s expectations gauge fell to 3.6 in September from 19.2 in August, a release Tuesday showed. Economists had expected a small drop to 17 and none foresaw such a slump. An index of current conditions also fell to -84.5. “The hope for a swift improvement in the economic situation is visibly fading,” ZEW President Achim Wambach said in a statement. “Although the falling economic expectations for the eurozone point to an overall rise in pessimism, the drop in expectations for Germany is significantly greater.” The prospects for Europe’s biggest economy have darkened after output surprisingly shrank in the second quarter amid a weak industrial performance. Consumers also remain hesitant to open their wallets — even as incomes have been rising faster than prices. Here is what Bloomberg Economics had to say: “The bigger-than-expected drop in the ZEW index adds to the recent stream of negative news for the German economy and makes another GDP decline in the third quarter more likely. With only a very modest expansion in the final three months of the year, economic activity might stagnate in 2024.” --- Martin Ademmer, economist.

The Bank of England warned investors it won’t rush to ease monetary policy, deciding against a second consecutive cut in borrowing costs as it awaits further signs inflationary pressures have subsided. The BOE’s Monetary Policy Committee voted 8-1 to keep rates steady at 5%, an outcome whose caution contrasts with the half-point reduction delivered in the US on the eve of the UK announcement on Thursday. While the decision was in line with the expectations of economists and investors, it pushed the pound to its strongest level against the dollar since March 2022. “We should be able to reduce rates gradually over time,” Governor Andrew Bailey said in a statement, stressing that such a path would depend on price pressures continuing to ease. “It’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much.” The BOE’s wary tone on the prospect of future loosening may dampen expectations in markets for the central bank to shift to quicker easing in borrowing costs later this year. Ahead of the meeting, investors had ramped up bets on successive moves from November, though policymakers didn’t explicitly endorse a change at their next gathering.

The BOE reduced rates for the first time in over four years last month in a tight 5-4 vote, with Chief Economist Huw Pill in the hawkish ranks opposing a move. However, the policy guidance in Thursday’s minutes added language that warned investors that officials will take their time in reversing the most aggressive tightening in decades. “In the absence of material developments, a gradual approach to removing policy restraint remains appropriate,” the minutes said. The guidance reiterated their preference for a meeting-by-meeting approach and the need for policy to remain “restrictive for sufficiently long.” The vow for a patient stance comes despite recent data suggesting that the threat from consumer prices is fading. Data on Wednesday showed inflation held at 2.2% in August, staying below the BOE’s forecast for 2.4%, though services inflation was uncomfortably high at 5.6%. Wage growth has continued to gradually ease and the economy has cooled, with gross domestic product stagnating in three out of the last four months. The BOE said that it now expects output growth to slow to 0.3% in the third quarter, slightly weaker than the 0.4% predicted in its August forecasts. Inflation is anticipated to pick up to 2.5% by the end of the year, slightly lower than the 2.8% previously projected. The UK decision is just one moving part in a pivotal week for central banks. Aside from the Fed rate cut, Brazilian officials raised borrowing costs for the first time since 2022, while Norwegian officials signaled no intention to ease until 2025.

Company Events

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