What to expect from this week's Fed decision and how it could shape markets going forward. Danielle DiMartino Booth, CEO of QI Research, breaks it down.
00:00I am joined by Danielle DiMartino Booth, CEO and Chief Strategist at QI Research.
00:06Danielle, thanks so much for joining. Great to have you.
00:09Great to see you, Caroline. Good to be here.
00:13Danielle, the Fed kicks off its two-day meeting today.
00:16The market, of course, is largely expecting it to hold rates steady.
00:19No change there. Is that the right call or a mistake?
00:23Well, I think with all of the drama that we've had over the last few weeks and months,
00:29I think that there should be every anticipation of absolutely no action at tomorrow's meeting.
00:35I think that the market's really going to be focused more so on dissents and how many dissents there are tomorrow.
00:43What are you looking for from Powell on Wednesday?
00:47Do you think he'll open the door to a rate cut come September?
00:52I do. I think that pressure is building from within the organization for him to do that.
00:57We've got fresh data in hand from the conference board that shows that jobs harder to get has continued to increase.
01:07We just got out quits data that showed that the number of Americans quitting their jobs has declined.
01:14The quit rate has declined.
01:16Those are all measures of job security or insecurity in this particular case.
01:23And we're seeing layoffs go off, go up, excuse me, in that jolt data as well.
01:29They pay attention to every data set.
01:31And I would anticipate that these would be serious subjects of discussion and debate at the meeting that starts today and ends tomorrow.
01:39OK, so because the Fed is data dependent, you think in terms of the economic data, it's slowed enough to warrant rate cuts.
01:47And what about on the inflationary side?
01:51Well, you know, it's interesting you mentioned inflation.
01:53Of course, shelter is the largest single input to inflation.
01:56We got out the Kay Shiller home price index this morning, CoreLogic Kay Shiller on a three month annualized rate.
02:05We've kind of swung from a positive 1.6 percent three months ago to negative 3.73 percent on a year over year basis.
02:14And Zumper also came out this morning showing that apartment rents have continued to decline.
02:20So that shelter disinflation impulse is just growing as a matter of time.
02:26And again, this will definitely be, among others, the subject of discussion, because there are major offsets to any kind of initial impulse we're seeing in terms of inflation from the tariffs thus far.
02:41Danielle, you've talked about some of the data points that warrant these rate cuts.
02:46You've also said that there's this quiet recession happening here in the U.S.
02:50What are those recessionary signs that you're seeing and why is there a disconnect?
02:55Because so much of the narrative is around the Fed, at least until this point, achieving this so-called soft landing.
03:04Well, you know, it's interesting you ask, because tomorrow morning at the meeting, they're going to have the latest revisions to quarterly payroll growth.
03:11We know that in the second quarter of 2024, for example, with the data that's going to be released tomorrow morning, that there were net job losses.
03:20In the second quarter of 2024, we expect to see a continuation of that negative momentum that is demonstrating to the Fed when the U.S. economy entered recession.
03:32Of course, layoffs only begin after recession has begun.
03:37They're a lagging indicator.
03:39And the fact that we've seen net job losses begin more than a year ago, again, is going to be very problematic for a lot of the members of the Federal Open Market Committee who are leaning more dovish.
03:51But, Danielle, the conference board just released the Consumer Confidence Report, and it showed that confidence actually rebounded in July.
03:59We're starting to see signs of strength in the consumer again.
04:02What do you make of that?
04:04Well, I think what you're seeing in the read-through there, and again, if you look inside the conference board's report, the jobs hard to get measure actually increased.
04:11In other words, it's harder for American workers to get a job.
04:16What you're seeing is the disinflation start to come through these confidence reports.
04:21Same with the University of Michigan.
04:23We're seeing quickly falling inflation expectations on households' parts, which is fabulous news.
04:29It's great news for the U.S. household that really has been debilitated by a rising cost of living.
04:36But, again, what you're seeing adds fodder, if you will, adds another element of argument for those who are dovish to say,
04:45hey, U.S. households are perceiving inflation as being lower going forward, but yet they're seeing the ability to secure employment actually getting to be rougher, tougher.
04:56So those are definitely in tension with one another.
05:01Tension is actually a word I bring up because that's a word that Powell has been using to discuss the tension between the inflation
05:08and the other dual mandate, the employment mandate, that the Fed has to comply with.
05:15Later this week, we will get additional readings on the economy with jobs data.
05:19We'll get inflation data.
05:21And then we also, of course, have a big week in terms of earnings with several mega cap tech names on tap.
05:28What do you think the stock market is most focused on right now?
05:32I think the stock market right now is focused more than anything else on momentum and the fact that there's a bit of an ironic trend going on right now
05:44and that the institutional investors are finding themselves chasing after the retail investor, the tail wagging the dog, so to speak.
05:51The stock market has not been focused on the economy for some time now.
05:56And I think that until we see this momentum, the flows into the market begin to recede.
06:03And we are seeing that on some levels in exchange-traded funds and mutual funds.
06:08But until we see a true reversal, I think right now the stock market is a reflection of momentum and flows.
06:15And do you think that momentum continues with Meta, Amazon, Apple, and Microsoft all set to report earnings?
06:22We've seen a lot of, you know, a resurgence really in the momentum in big tech, not necessarily in terms of Apple, but with some of those other names.
06:31Will that continue and will it continue to lead the market?
06:34Well, the bar is certainly set very high for the names that you've just mentioned.
06:37But I think as long as there are remote beats on earnings that we're going to see continued momentum.
06:45A lot of the big sell-side investment banks have been putting out fresh reports about, you know,
06:50unforeseen before in the history of the market all the way back to 1929, the level of concentration, where returns are coming from.
06:57And they're squarely inside of that smaller and smaller group of market leaders.
07:02And there is no reason to think, again, with the meme stock mania resurging, that there is going to be any pullback in momentum unless there are some serious disappointments.
07:14No reason to think that.
07:15But given the fact that you think the economy is in this quiet recession and you're pointing to data that points to at least a slowdown,
07:24where should the market be trading right now and where does it go from here?
07:27Well, I think it's going to be a buy the rumor and sell the news type of thing.
07:33I don't think the market's actually going to appreciate it if we wake up on September the 17th and find out that the Fed indeed is going to be lowering interest rates,
07:41because that will be a recognition, if you will, of the slowdown in the economy.
07:46And I think that is that will be the first wake up call for stock market investors, if you will.
07:51And that is indeed how history has tended to play out when the Fed finally begins to concede to a slowing economy.
07:58The stock market does not appreciate it.
08:01So bottom line, between now and year end, do we see more gains?
08:05Do we end the market higher or lower than where we are right now?
08:09I think we see a tremendous amount of churn.
08:12And one of the areas that we're directing our clients right now is increased volatility.
08:16I think if there's one area of the market that is seeing serious suppression, it's the VIX index, it's the credit, the move index.
08:23So I think that that is where a lot of the action is going to be, whereas there's going to be a lot of churn in the actual level of the stock market going forward.
08:32But again, it all comes down to mentality, momentum, flows.
08:36And these are very automated functions that control well more than 50 percent of the behavior in the stock market right now.
08:42Okay, we'll leave it there.
08:44Danielle Demartino-Booth of QI Research, thank you so much.
