Switzer on Saturday

Will the first cut be the deepest?

Founder and Publisher of the Switzer Report
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Only history will ultimately tell us if this first rate cut of the Federal Reserve of 50 basis points, when the consensus of economists was tipping only a 25-basis point cut, will prove to be the deepest. I hope so because another 0.5% cut could send the wrong signals that the US central bank would be more worried than Jerome Powell was this week, when he faced the press.

In fact, it was his candidness about not being worried about a too slowing economy or sticky inflation that suggested he thinks he has pulled off the Goldilocks play of an economic slowdown or soft landing, with inflation heading towards the target of 2%.

Two market watchers who wanted to see a 0.5% cut had interesting responses.

The first was Jeremy Siegel, Professor Emeritus at University of Pennsylvania’s Wharton School of Business, who said this to CNBC: “This was the best news I’ve heard from the Fed in years…this is fantastic news for the market, and great news for the economy”.

A little less positive was Jeffrey Gundlach who underlined a concern that could preoccupy the market until after the US election on November 5.

“I expect to see weaker economic data in coming reports, I still think there’s a good shot that the history books will say September 2024 was the start of a recession”.

If he’s right, then Jerome Powell will go from a hero of monetary policy to a prized nincompoop. So, once again, we’ll be watching the data drops until it’s decided that a recession isn’t on the cards.

By the way, the economic indicators out this week for the US economy were better than expected. They added credibility to this from Jerome Powell after the 0.5% rate cut was announced: “We know it is time to recalibrate our (interest rate) policy to something that’s more appropriate given the progress on inflation,” Powell said. “We’re not saying, ‘mission accomplished’…but I have to say, though, we’re encouraged by the progress that we have made”.

“The U.S. economy is in a good place…and our decision today is designed to keep it there.”

Away from Gundlach’s recession call, I did like it that he supported what I’ve been saying for some months on how rate cuts help smaller cap businesses. “I’m pretty sure that this fed cycle will create a much bigger tailwind for the Russell 2000 than the S&P 500,” he said.

Part of his thinking is that small cap businesses are often loaded with floating interest rate loans, so as rates fall, their bottom lines improve. Also, many of their customers have more money in their pockets because of lower rates.

Importantly, we saw two positive days for stocks on Wednesday and Thursday after the so-called “jumbo cut”. However, a bit of hesitancy creeped into on Friday with the Dow Jones up less than a point and the other key market indexes in negative territory, though it wasn’t panic or recession fears ‘stuff’. After big runs up, it makes sense that some profit-taking happens, until all concerns are put to bed, clearing the way for another leg up for stocks.

Date drops over the next month or two will be critical to where stocks go from here. I hope Professor Siegel and Jerome Powell are more on the money about the US economy than Mr Gundlach!

This from Nationwide chief of investment research Mark Hackett sums up the overall thinking of the market on Friday: “Investors viewed the aggressive rate cut as a positive catalyst…the Fed was able to effectively convince investors that the sizable cut is a proactive measure to sustain economic momentum, rather than a reactive move to stabilize it. The strong market reaction indicates investors have confidence in the Fed and have a ‘glass half full’ mentality.” (cnbc.com)

To the local story and our gains were totally down to the positivity created by the Fed’s surprise big rate cut and Jerome Powell not spooking the market with warnings. The S&P/ASX 200 ended up 66.7 points (or 0.82%) to finish at 8209.50. That’s a 2.65% gain over the past month and 7.63% year to date. Over that same timeframe, the US-based S&P 500 is up a whopping 20.47% because the Yanks have got inflation down to where rate cuts were expected and then the first one happened.

We need to see the same set-up here before our market can play catch up. (See the big dates and data drops that could help our market deliver some bigger gains on the back of lower rates.)

Stocks stars & strugglers this week

The stars!

  1. Seek: +7.06% to $24.25.
  2. Telix: +8.23% to $20.31.
  3. Life360: +5.94% to $18.09.
  4. Zip: +14.35% to $2.67.
  5. Bapcor: +6.88% to $5.13.
  6. Sims: +11.25% to $12.36
  7. James Hardie: +6.63% to $57.89.
  8. New Hope: +11.24% to $4.75.
  9. Centuria Capital: +9.47% to $2.08.

The strugglers…

  1. Cettire: -5.85% to $1.40 on US plans to target duty-free thresholds on imports.
  2. ALS: -7.97% to $13.86.
  3. Resmed: -4.38% to $35.38.
  4. Computershare: -10.24% to $25.41.
  5. Healius: -8.52% to $1.61.

What I liked

  1. The Fed cut by 0.5% instead of 0.25%, and the market didn’t panic that the action suggested that the central bank was worried about recession.
  2. The Fed member’s expectations for interest rates (otherwise known as the “dot plots”) showed a lower profile for interest rates, with two 25 basis point rate cuts before the end of the year and a 25-basis point rate cut in each quarter of 2025.
  3. US August retail sales rose by 0.1% month-on-month, beating expectations of a small contraction.
  4. US August industrial production rose by 0.8% over the month, above expectations for 0.2%. These good numbers might mean less rate cuts but also no recession.
  5. While the number of jobs created locally in August was bigger than predicted, there are signs that the labour market is loosening. This from the CBA’s Belinda Allen explains it: “The Aussie economy added a whopping 47,500 jobs in August, well above market forecasts for a 26,000 rise, though all the gains were in part-time employment. Revised figures for July showed a climb of 48,900 jobs, downwardly revised from an earlier figure of 58,200 jobs”.
  6. Those worried about a local recession should like to know that conditions in Australia’s manufacturing sector gathered momentum moving into the second half of the year, the Westpac-ACCI Actual Composite Actual lifting from 54.6 to 56 for the September quarter.

What I didn’t like

  1. With unemployment stuck at 4.2% and 47,500 new jobs created in August, it makes it hard for the RBA to support a rate cut any time soon, which doesn’t help local stocks. But we can thank Wall Street for providing a tailwind for our market.
  2. Israeli attacks in Lebanon. This Middle East drama can’t be totally ignored.
  3. The US secret service! They look hopeless!
  4. Chinese activity data for August was broadly disappointing.
  5. The Eurozone ZEW index of investor confidence fell further in September and deteriorated significantly for Germany (see the chart below), with the current economic sentiment index falling from an index of 19.2 to 3.6 in September.

The big data drop dates

Anyone hoping for rate cuts this year (and I’m for those with loans and those who want stock prices to rise), must hope these dates below bring the right news to help the RBA embrace the start of rate cuts:

  1. September 25

The CPI for the 12 months to August has to be lower than the 3.5%, that we saw in July.

  1. October 17

September jobs report and unemployment needs to rise, and jobs growth has to be unimpressive.

  1. October 30

The CPI number for the September quarter and the 12 months to September both have to be convincing the RBA that inflation is dropping nicely.

  1. November 14

If the RBA doesn’t move on rates on Cup Day on November 5, then it will see the October jobs report on November 14. We need to see a less-than-positive jobs report.

  1. December 6

The September National Accounts are released on this day if they’re negative, it could worry the RBA to cut on December 10.

The RBA would want to cut to take the political pressure off, but it needs the data to deliver good reasons to do so.

 

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The Week Ahead

Top Stocks — how they fared

Most Shorted Stocks

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before 

 

Qoute of the Week

Fed boss Jerome Powell on slowdown concerns after the jumbo 0.5% rate cut: “I don’t see anything in the economy right now that suggests that the likelihood of a recession, sorry, of a downturn, is elevated. I don’t see that. You see growth at a solid rate. You see inflation coming down. You see a labour market that’s still at very solid levels. So, I don’t really see that now.”

 

Chart of the Week

The August Labour Force report wasn’t the best of news for interest rate worriers but there are signs that this hot market is cooling.


Disclaimer

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.