How Many Rate Cuts Is the Market Pricing In Now?

Friday, March 15th, 2024

Market indices this morning will attempt to reverse their fortunes, as yesterday’s cool-down brought three of the four majors down a third of a point, while the small-cap Russell 2000 dropped a not-inconsequential 2.3%. Experienced traders and investors are well aware of the often erratic behavior of the Russell relative to its larger-cap brethren, but it is now the only index to be in the negative over the past month of trading.

We’ll see if the small-caps can gather themselves into the final trading day of the week, but if we continue to see this narrative persist, we know basically where it comes from: a “higher for longer” scenario on interest rates, which would affect smaller companies negatively before they’d hurt bigger corporations. And with still-robust economic data sprinkled all throughout this past week, it’s hard to keep the faith that four rate cuts are coming in 2024. Keep in mind, not too long ago, four cuts was at the low end of the expected range — all the way up to six or seven cuts.

That ship has now sailed. Analysts still have a June rate cut on their calendars, but in pencil this time. And, this being a General Election year, the Fed will likely face pressure not to make any sudden moves in September, six weeks ahead of the November presidential election. This leaves June, July and the two months post-election for the Fed to reduce rates based on their scheduled FOMC meetings. Of course, if conditions demand — as they did four years ago with the onset of the Covid pandemic — the Fed could step in and make changes when they see fit.

Keep in mind that what the Fed wants to see is a cooling economy without freezing into recession, aka the “soft landing.” And in terms of consumer data, including Retail Sales yesterday and the Beige Book last week, we are seeing signs of the American consumer repelling from high-priced goods and services. We’re also seeing a bit of softening in things like wage growth in our employment data — again, a good thing from the Fed’s perspective. (Only once inflation is tamped down sufficiently will interest rates start coming down.) But signs of softening in the economy are having the reverse-effect in the markets, especially up here near all-time highs.

Import Prices for February matched expectations at +0.3%, down notably from the unchanged +0.8% the month prior. Ex-fuel prices, this came down to +0.2% from +0.7% posted a month ago. Year over year, we’re still negative here: -0.8%. But Export Prices blossomed to +0.8%, 4x the consensus estimate of +0.2% — likely the result of higher oil prices, of which the U.S. now leads the global market. This is still down 10 basis points from January’s +0.9%.

Empire State manufacturing for March this morning made it four negative months in a row, down to -20.9. This was still an improvement from the steep -43.7 drop in January, which was the worst since the heart of the pandemic. But manufacturing in New York State — as we’ve seen in Philly Fed data, which is due next week — has been historically soft for the past two years. The last positive print was a +9.1% back in November. Prices paid and received were both up, but new orders and employment were both negative.

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