Closing Thoughts for the Week

A combination of easing geopolitical tensions and a growing expectation that the Fed will begin launching into rate cuts soon has investors in a bullish mood. While the global temperature being taken down a bit is a good thing, there are still some things to be concerned about on a trend basis. The market’s been waiting for a resumption of the rate cutting cycle and it looks like it’s most likely to begin in September. The labor market and the housing market, however, are starting to raise some flags.

In general, investors continue to believe that recession is not an imminent risk and that’s enough to add support for equities. The soft data looks like it’s starting to line up with the hard data. The tail risk, however, could be Japan. The economic data as it is wouldn’t suggest that monetary easing is needed right now, but there’s also the argument that the Fed Funds rate should be normalized while conditions allow.

Not surprisingly, geopolitics dominated the narrative, but for different reasons than we’ve seen in the recent past. The clear implication of this is that it could push Fed rate cuts further into the future the longer this conflict continues. One of deregulation’s biggest beneficiaries is the energy sector. The risk of another big reverse yen carry trade, which almost certainly didn’t end with what happened in August, could damage global equities even more.