The Last Rate Cut of 2024

“Throughout history, governments have been chronically short of revenue. The reason should be clear: unlike you and me, governments do not produce useful goods and services that they can sell on the market; governments, rather than producing and selling services, live parasitically off the market and off society.”

– Murray Rothbard

November 7, 2024— Today, the Federal Reserve will meet. And cut rates by 25 basis points.

But the real story will be in what the Fed says about their future policy. Since their 50-point kickoff, the economic data has pointed to a deteriorating labor market.

The U.S. economy added just 12,000 jobs in total in October. And without a surge in government jobs, the number would have been negative. Today’s jobless claims data also shows unemployment inching higher, with initial claims rising by 3,000.

Friend of Grey Swan Andrew Zatlin views it differently:

“Deteriorating is a strong word for what is really normalizing. Jobs will surge in January once we start the new year.”

It’s true. The labor market is coming off of historically low unemployment. Labor force participation rate has also been rising. But we’re also entering temp hiring for the holidays, which skews the actual numbers every year.

Current low jobs numbers are in part due to fewer people actually looking for stable long-term work.

The “participation” trend has been declining for two decades. The heart attack signal you see there in early 2020 represents the “stimmy” checks sent out by the US treasury after the government told people not to work during the pandemic.

If number of people looking for work was back to its pre-pandemic levels today, the unemployment rate would be closer 5%… and closer to the historical norm.

Our working theory today is if the jobs numbers are normalizing at a respectable pace, as Zatlin suggests, the Fed won’t surprise with another 50-point cut today. And they’re likely to slow their roll for a while.

The mismatch in economic data is interesting, however. And is giving rise to an anomaly stock market observers, like our own John Rubino, don’t often see. John identifies a curious post-election correlation – and tells us what it means – below. Enjoy – Addison

These Two Things Don’t Go Together

John Rubino, John Rubino’s Substack

The election is over, and the result is pretty close to a best-case scenario. The victory margin is big enough to head off the expected civil unrest, giving us a more-or-less peaceful transfer of power. And if Trump and his team keep their promises, they’ll quickly address the existential threats of global war and mass illegal immigration, while protecting free speech.

There is, in short, reason for optimism — or at least relief — on several fronts.

Now for the bad news. This morning the financial markets responded to the election in two completely incompatible ways. First, traders bid up stocks:

Dow soars 1,300 points to a record, Russell 2000 jumps 4% as Trump defeats Harris: Live updates

(CNBC) – Former US President and Republican presidential candidate Donald Trump speaks during an election night event at the West Palm Beach Convention Center in West Palm Beach, Florida, on November 6, 2024. Republican former president Donald Trump closed in on a new term in the White House early November 6, 2024, just needing a handful of electoral votes to defeat Democratic Vice President Kamala Harris.

Stocks rallied sharply on Wednesday, with major benchmarks hitting record highs, as Donald Trump won the 2024 presidential election.

The Dow Jones Industrial Average surged 1,319 points to a record high, or around 3%. The last time the blue-chip Dow jumped more than 1,000 points in a single day was in November 2022. The S&P 500 also hit an all-time high, popping 2.1%. The Nasdaq Composite climbed 2.4% to a record of its own.

Investments seen as beneficiaries under a Trump presidency erupted as the former president appeared set to claim victory. Tesla, whose CEO Elon Musk is a prominent backer of Trump, saw shares surge 13%. Bank shares got a boost with JPMorgan Chase climbing 10% and Wells Fargo jumping 13%.

The small cap benchmark Russell 2000 surged 4.7%. Small companies, which are more domestic-oriented and cyclical, are believed to enjoy outsized benefits from Trump’s tax cuts and protectionist policies.

“For now, investor sentiment is pro-growth, pro-deregulation, and pro-markets, as seen in the overnight market action,” David Bahnsen, chief investment officer at The Bahnsen Group. “There is also an assumption that M&A activity will pickup and that more tax cuts are coming or the existing ones will be extended. This creates a strong backdrop for stocks.”

At the same time, interest rates spiked:

Longer-term Treasury Yields & Mortgage Rates Explode, Yield Curve Un-Inverts Further as Bond Market Gets Spooked

Going to further crush demand for existing homes. Bondholders feel the pain.

(Wolf Street) – Longer-term Treasury yields spiked this morning, on top of the surge since the September rate cut. Spiking yields means plunging prices, and it has been a bloodbath for bondholders.

The 10-year Treasury yield spiked by 20 basis points this morning, to 4.46% at the moment, the highest since June 10. Since the Fed’s September 18 rate cut, the 10-year yield has shot up by 81 basis points. 5% here we come?

Mortgage rates too. They roughly parallel the 10-year yield, and they spiked today 7.13%, according to the daily measure from Mortgage News Daily.

Mortgage applications through the latest reporting week, which doesn’t capture the last two days, already dropped further from the frozen levels before, pushing down further the demand for existing homes, which is on track to plunge to the lowest levels since 1995 this year.

For the housing industry, and for home sellers, this U-turn was a painful slap in the face. At this pace, the yield curve will enter the normal range soon – but in the opposite way of what the real estate industry had hoped. It had hoped that the Fed would cause short-term yields to plunge to super-low levels in no time, which would drag down longer-term yields, and mortgage rates would follow.

But mortgage rates had already plunged from nearly 8% in November last year to 6.1% by mid-September this year, without any rate cuts, on just a wing and a prayer, thereby pricing in all kinds rate cuts and whatnot. And since the rate cut, much of the wing-and-a-prayer plunge in longer-term yields has reversed, that’s all that has really happened.

The real estate industry was expecting about 5.x% mortgages by about right now, and they were already close in mid-September with 6.1% mortgages, and some were talking about 4.x% mortgages just in time for spring selling season, and today they’re looking at 7.13% mortgages.

Which Trend Wins?

If stocks and interest rates can’t both rise in the long run, which trend is right and which is wrong? This chart contains the probable answer:

We’re so deeply in debt that rising interest rates have become intolerable. So if the Fed doesn’t intervene, the markets will.  ~~John Rubino, John Rubino’s Substack

Regards,

Addison Wiggin,
Grey Swan

P.S. Now that it’s the “morning after” give us your own forecast. What do you expect the election results will mean for the markets, the Fed and the economy in 2025? Reply here: addison@greyswanfraternity.com.