Wall Street breathed a sigh of relief this morning as initial jobless claims and retail sales for July underscored the resilience of the labor market and consumers in the face of ongoing inflationary pressures. Yung-Yu Ma, chief investment officer of BMO Wealth Management US, joins the Morning Brief to analyze the numbers and what they mean for the economy ahead of the Federal Reserve’s September interest rate decision.
“It’s a very sensitive market. And now, all of a sudden, things are coming together. And what looks almost like a Goldilocks scenario in the data is a huge shift from what we had about a week ago when there was a market sell-off. But now the consumer price index (CPI) is weak, which was to be expected. But then weekly initial jobless claims continue to decline and retail sales are very strong. We now have a very strong data convergence, along with comments from the Fed that they are ready to cut rates and respond to labor market weakness. So it’s really coming together in a good way. And we think the soft landing is firmly established and probably actually sets the stage for a growth acceleration towards the end of the year into early 2025,” Ma explains.
In 2025, he expects market growth to come from pent-up corporate spending that will be released as interest rates fall. In Big Tech in particular, Ma sees “a lot of room” for investment not just in AI data centers and chips, but also a broader trend of companies investing in the technology to gain efficiencies. While investors are torn on whether AI spending is sustainable and will generate profits, Ma points out that the technology is “still in a very early stage.” He therefore expects the technology to be “much broader in terms of its penetration of the economy than it is now.”
Click here to watch the full episode of Morning Brief for more expert insights and information on current market events.
This article was written by Melanie Riehl
Video transcript
First of all, this market is currently dependent on economic data as we try to figure out whether or not the Fed is actually behind on its rate cuts.
How do you continue to navigate the volatility we have seen so far in August?
Yes, thanks, Brad.
Nice to be here.
It’s a very sensitive market and right now all of the things are coming together and it almost seems like a Goldilocks scenario for the data.
Uh, that’s a huge change from what we had about a week ago when there was a sell-off.
But now the CP I ratio is weak, as expected, but then weekly initial jobless claims continue to decline and retail sales increase.
Very strong.
We have very strong data convergence.
Now there are also statements from the Fed that it is prepared to cut interest rates and will respond to the weakness of the labor market.
So it’s all really coming together in a good way and we think the soft landing is firmly established and probably actually setting the stage for a growth acceleration towards the end of the year.
Beginning of 2025.
Therefore, we believe that the market reaction is correct and that these data will be received very positively.
And what do you think these growth prospects will look like in 2025?
We expect much of the growth to come from corporate spending.
We believe there is a lot of pent up demand.
Once interest rates come down somewhat, as the market had expected, the Fed expects to cut rates by about 1% by the end of the year.
Maybe it’s only three-quarters of a percent, depending on how the data comes in.
Special.
Uh, some of the jobs reports that are coming out in the next few months.
But whether it’s three-quarters of a percent or percent, it’s probably just enough to get companies to start disclosing some of their spending plans.
Uh, that may have been on hold for a while, some of the pent-up demand, uh, also in the area of consumer credit.
We believe there may be broad-based credit expansion in 2025 as we hear more about corporate spending plans, although this is an area that investors have criticized.
Big, ongoing spending on generative AI, uh, especially by some of the big technology companies that have said, “Hey, we’re just getting started.”
Uh, and they’re looking for the payout, and some of the investors are looking for the shareholder return at the end of the day.
If there are indeed more such spending announcements, what are your concerns in terms of whether this could impact earnings growth?
So there’s mixed data on this, right?
And there are concerns, there are concerns that some of the AI spending is not sustainable and does not lead to ultimate productivity or efficiency gains for businesses.
We believe AI is still in its very early stages and this spending will be much broader than it is now in terms of its penetration of the economy and the way companies will focus on it in the coming years.
So we still believe we are at an early stage.
Of course, there will be some fluctuations in the data and enthusiasm for AI.
But we believe there is still a lot of room for investment here, whether it’s just data centers or chips.
But it will really spread throughout the economy as companies want to invest more in it and look for ways to increase their efficiency.
J.: When you give your outlook here, you might expect growth towards the end of the year, especially until 2025.
They look at these data points much more intensively than expected.
Prints this retail sale.
Does this essentially mean that a 50 basis point cut next month is off the table?
I think that’s a big number.
I mean, there’s no doubt about that.
This is a very big surprise, positive for retail sales and very broad based.
This is where the consumer shows a lot of strength.
I don’t think a 50 basis point cut is off the table.
I am convinced that the August employment report will still play an important role for the Fed in assessing and determining how much to cut interest rates in September.
And let’s not forget that the tariffs are very restrictive.
The president of the Chicago Fed has spoken out and said exactly that: Considering that the economy is currently in equilibrium, which may be the case between the rate of inflation and the state of the labor market, interest rates are still very restrictive.
There is therefore considerable scope for the Fed to cut interest rates.
Whether it will be a 50 basis point cut right at the start remains to be seen, but I don’t think that takes the issue off the table, and that’s what the market is so excited about.
Combined with this strong data, we could achieve strong cuts.
If there are no deep cuts, how long will the broader interest rate policy cycle of cuts extend, given that that is expected to start at the September meeting. Because even if we don’t get to 50 basis points, all eyes seem to be on at least 25, all eyes are on 25, but also in November and December we are expected to cut rates further.
So I think what the market is seeing and leaning on here is that the Fed is about to embark on a rate cutting campaign that will likely last for most of 2025, if not all of 2025.
So if you think about this development, you can see that the market is currently moving in a very pleasant and almost enthusiastic direction and that it would certainly be nice to start with 50 basis points.
I think the Fed has room to maneuver in this regard, given the current state of CP I inflation data and the current somewhat weakening labor market.
Uh, but regardless of whether we start doing that, uh, it’s important to keep in mind that the Fed is going to be in rate cutting mode for some time.
Young Yuma BMO Wealth Management, USA, Chief Investment Officer.
Thank you for joining us this morning before the opening bell.
Thanks, Brett.
