The S&P 500 closed at a fresh high yesterday (5,718.6) as the Fed cuts rates into a strong economy. The real estate sub-index in the S&P 500 is up 17.0% QTD. Big tech is investing heavily in data centres, and manufacturing construction continues to boom. Utilities are outperforming too, with large upward revisions to projections for energy demand from data centres. 6,000 on the S&P 500 is certainly possible by year end, with nominal GDP growth tracking at 5-5.5%. The slowdown in unit labour cost growth, and improvement in productivity, suggests the Fed has every right to prioritise the employment side of its dual mandate.
That said, it remains hard to justify the degree of rate cuts currently priced over the coming year. Thirty-year Treasury yields are in fact now up 6 basis points YTD to 4.09%. The yield curve is steepening, because there is no evidence of a slowdown in growth. The long bond may be hinting that monetary policy is once again too loose. With the Federal budget deficit on course to total $2tr again in FY24, term premia should be positive.
By the time the FOMC reconvenes in November, the jobless rate (4.22% in August) may already have fallen back below the FOMC’s median longer run estimate for the unemployment rate (4.2%). The S&P 500 human resource & employment services index has rallied 15.9% so far this quarter. Job postings on Indeed appear to have bottomed. If the Fed cuts rates too far and too fast, it may eventually be forced to hike again in 2025. This need not be negative for equities: the Treasury market may simply need to recalibrate the neutral rate further.
