Rate-cutting cycle kicks off

During the last quarter, US equity indices reached new all-time highs as the US Federal Reserve (the Fed) commenced its rate-cutting cycle with a cut of 50 basis points (bps) in September 2024, lowering the upper target of the overnight rate from 5.50% to 5.00%. The market prices for an aggressive rate-cutting cycle to take the overnight rate to below 3.00% within a year.

Much of the deepening in US rate cut expectations has occurred since the US unemployment rate rose from 3.5% to 4.0%, which triggered the so-called Sahm Rule. The Sahm Rule identifies signals related to the start of a recession when the US unemployment rate rises by 0.5% or more over three months relative to its previous annual low. The market assumes on the basis of this recessionary indicator that the Fed will need to act with gusto to lower rates and support a weak economy. One reason why this argument may be flawed is that the Sahm Rule does not consider that US population growth has exceeded 1% per annum on average for each of the last three years – or its highest population growth rate in almost 20 years. The majority (or roughly 85%) of this increase has been due to immigration, while the rate of net new births (i.e. births less deaths) has declined to new lows. This would imply that over the last three years, roughly nine million new people arrived in the US, and yet against that statistic, there were only 7.1 million unemployed people (or a 4% unemployment rate) and 7.6 million vacant job listings as of July 2024. In short, this does not seem to imply calamity for the US economy.

Locally, the South African Reserve Bank (SARB) kicked off its rate-cutting cycle with a far more muted 25 bps cut in September – lowering the overnight rate of interest from 8.25% to 8.00% in a unanimous vote. The SARB outlined the case for caution when lowering rates and cited risks to inflation via potential offshore trade tariffs, which raise the price of imported goods. 

Read full article on https://www.allangray.co.za/latest-insights/markets-and-economy/rate-cutting-cycle-kicks-off/

October 18 2024 By Thalia Petousis