Why the Fed may do another 'jumbo' cut

Wed, Sep 25, 2024, 7:58 AM

The Dow Jones Industrial Average (^DJI) and the S&P 500 (^GSPC) have reached record highs as stocks rally following the Federal Reserve's interest rate cut last week. With an aggressive 50 basis point cut initiating the easing cycle, Wall Street is trying to gauge the Fed's next move and its implications for markets going forward.

Annex Wealth Management chief economist and strategist Brian Jacobsen joins Morning Brief to discuss this situation.

While initially surprised by the Fed's 50 basis point cut, Jacobsen says he's now "warming up to the idea" of another aggressive cut. Although he previously believed a 25 basis point cut at each meeting for the remainder of the year "made sense," he now expresses concern about continued labor market weakness.

"I think we're going to see more cooling of the labor market, which might tilt them more toward a 50 basis point cut as opposed to a 25," he tells Yahoo Finance.

Regarding unemployment, Jacobsen notes that layoffs currently represent a "very, very low" percentage of what's driving the rate higher. This suggests companies are retaining workers and allowing their workforce to "naturally shrink." However, he cautions that if layoffs accelerate beyond the hiring rate, it could lead to weakness in the job market.

00:00 Speaker A

Stocks though, this is the context, have hit fresh records this week as the easing cycle kicks off from the Fed. Investors now have plenty of upcoming data to assess the broader health of the economy and solidify bets on whether or not the Fed will deliver another jumbo cut in November. Take a look at this. Currently markets slightly favoring another 50 basis point reduction at the FOMC's next meeting. Joining us now, we've got Brian Jacobson who is the chief economist and strategist at Annex wealth management here. Brian, great to have you here with us. Are you in the camp expecting another jumbo cut?

01:08 Brian Jacobson

You know, I think I am warming up to the idea that they might do another jumbo cut. Uh honestly, I was a little surprised that they did the 50 basis points last time. And so maybe I'm just trying to hedge my bets here because I thought that what they laid out as far as 50 basis points and then 25 and another 25 for the balance of this year kind of made sense. My fear is that we're going to see a little bit more labor market weakness. And if you kind of think about the balance of data that we're going to get between now and when they meet next, we get one more inflation report and then we get two more job market reports as far as the employment situation report. I think we're going to see a little bit more cooling of the labor market, which might tilt them more towards a 50 basis point cut as opposed to a 25.

02:42 Speaker A

So, in that event, what are you expecting in terms of the labor data, especially as that's come more into focus and much more pressing for the Fed at this juncture?

03:02 Brian Jacobson

Yeah, it's really interesting how a lot of businesses have really tried to shy away from going out and actually laying off individuals, discharging people. And so if you look at the job opening and labor turnover statistics data, the Jolts report, that shows layoffs and discharges as a percentage of employment are very, very low. Yet, the hiring rate is also very low. And so it's almost like they're trying to hang on to the employees they have and just let their workforce naturally kind of shrink through what's called attrition. Now, my fear is that we're going to see that layoff number begin to slowly move higher, not necessarily abruptly. And if that moves higher before the higher's rate increases, we could see more weakness. That's likely going to become evident next week Friday when we get the employment situation report for the month of September. And then right before the Fed meets the week before on November 1st, we get the employment situation report for October, that will probably show further cooling of the labor market.

04:58 Speaker A

Brian, are those the two most important reports for the market for investors to be watching at this point?

05:13 Brian Jacobson

You know, from a macro perspective, I think that they are, but in terms of what's most important for the markets is October 11th is when we kick off earning season. And right now when we go into that, according to some of the factset numbers that we've looked at, it says about 4% year-on-year increase in earnings per share, which is a very muted increase. Yet when we look out to what about for 2025, investors seem to be penciling in about a 15% increase in earnings per share, which seems a little aggressive. And so I think that really the biggest data releases are going to be when we get into the thick end of earning season there.