Banking on the Economy

The Fed has always talked about looking at the data.  Despite the market clamoring for cuts earlier in the year, they waited.  Weakening employment numbers triggered a fifty-basis point cut; however, the trajectory for a further three cuts before Christmas was curtailed as September’s Nonfarm Payrolls came in strong.  The curve has backed up so much that a full two cuts aren’t priced in for the year, with expectations for rates now bottoming out in mid-2026 rather than late 2025.  Clearly, the evidence seen in September instigated the need for a double cut, but ever since the market data has been reassuring for a slower pace of Fed cuts.  There remains a significant amount of time between now and the next meeting, at least in financial market terms, with the US election closing less than 48 hours before Powell announces the decision.  Politics shouldn’t change the decision – the Fed is agnostic – but tax cuts, tariffs, spending decisions are all factors that will impact the conversations on medium term prospects for the economy.  It is never simple, especially when the Fed control much of what they do looking in the rear-view mirror.

With recent evidence being positive and indicating a potential soft landing becoming reality, the outlook supporting the grind higher across equity markets.  Entering earnings season, it feels necessary for companies to underpin this confidence with solid numbers and reassuring outlooks into 2025.  It kicked off with JPMorgan and Wells Fargo, both delivering 3Q numbers ahead of expectations, with commentary on the health of the consumer significant enough to push the KBW Bank Index up over 3%.  Additional comments also insinuated some bottoming out of the commercial real estate market’s decline.  Brighter spots in this market have been rare as banks have been struggling with the valuation impacts of higher rates, lower occupancies and debt levels across the sector since the pandemic hit.  Occupancy dynamics have stabilized, and rates have reduced from the highs in recent months.  However, the differential in assumptions will cause shortfalls for some lenders, so it remains a potential risk in financial investments.  Nevertheless, if there is a more managed cycle of maturing positions then it will soften the potential impact and limit the potential contagion into the wider market.  Wall Street names reported a pickup in their investment banking operations, with changes in interest rates and equity market appreciation serving as solid profit drivers.  Investment banking is not always an indicator of a thriving economy, volatility drives trading floors, but when it’s backed by corporates confidence, it provides a foundation for a wider read across.  Despite concerns about the position of the U.S. economy, the data suggests it remains the brightest light among Western economies. 

The bright spot for global investors at the end of September had been China, with President Xi announcing wholesale steps to recharge the economy.  However, the light may already be dimming, as the stimulus injection may not be as comprehensive as originally thought.  The Shanghai CSI 300 Index saw gains of over 30%, but it has now fallen nearly 10% as many investors banked their short-term gains after seeing the mixed messaging from the government.  Economic data remains weak, and therefore, the impact of the stimulus will likely take time to show in the numbers, especially if it is being fed in at the municipal level only.  There could still be legs in the China trade, but its long-term success will fundamentally depend on transitioning from an industry-driven to a consumer-driven economy.

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