Last week was light on news, but heavy on opinions. Seemed like EVERYONE had something to say about the labor market numbers, the state of the economy and why we are or are not heading to a recession.

Some economists are now saying that investor fears about recession are overblown. After a bloody Monday in the stock market, stocks recovered for the rest of the week and a result of that more confident belief that we aren't heading imminently towards recession, rates went up a bit. 

The average rate on a 30-year fixed rate conventional loan went to 6.5% (up from the 6.43% reported last week).  Still near 12 month lows!

The "Global Sell Off" That Didn't Happen

Last Monday, the Japanese stock market fell 12.7% in a single day - the worst day for a stock market since Black Monday in 1987 - in large part because the Bank of Japan signaled it would be raising rates but also because the US Jobs Report from August showed the US was slowing, significantly.

Because the world is so interconnected economically, the ripple effects caused the US stock market to also have one of its worst days in years as all major indices fell about 2%. A stock market failure can lead to lower rates - as we saw in 2020 - a failing stock market prompted the Fed to move quickly to lower interest rates and re-ignite trading.

Unfortunately for homebuyers - but fortunately for everyone's 401k - a large scale global sell off didn't happen as economists were quick to point out that one loose thread doesn't unravel the whole sweater.  The Japanese stock market quickly rebounded on Tuesday and the US stock market followed suit. 

Jobless Claims Fall Week Over Week

Weekly initial jobless claims are back in focus now that the labor market is a serious point of concern for the economy. Initial jobless claims were 233,000 for the week (down 17,000 week over week and less than the 240,000 expected).

Headlines were quick to cheer this report. Yes, a decrease of 17,000 week over week is big, but we are seeing much higher jobless claims than we saw months ago AND initial jobless claims have always been a volatile number - in fact its so volatile that most economists and analysts only look at it on a 4 week moving average. Economists and analysts also put even more emphasis on continuing jobless claims, which increased week over week.

As you can see in the graph below, on a 4-week moving average we are at 12-month highs. Sometimes headlines can skew opinions so make sure you are digging into the numbers. If this average continues creeping up, it will only build the case that the Fed needs to cut fast and deep!

What's the Fed saying about all this?

The good news - even the most hawkish (aka anti-rate cut) Fed members are publicly stating that they are in favor of rate cuts.

Mary Daly, who has never been supportive of rate cuts in the last year, has finally cracked. “Policy adjustments will be necessary in the coming quarter. How much that needs to be done and when it needs to take place, I think that’s going to depend a lot on the incoming information,” she said during a forum in Hawaii. “But from my mind, we’ve now confirmed that the labor market is slowing and it’s extremely important that we not let it slow so much that it turns itself into a downturn.”

Austen Goolsbee, who I would say is pretty pro-rate cut or dovish, also said last Monday, “if the conditions collectively start coming in [cooler than expected] on the through line, there’s deterioration on any of those parts, we’re going to fix it.” And by fix he means, cuts rates!

RATE CUT WATCH:

There's a 100% chance of seeing a rate cut on September 18th!

Odds between a 50bp cut vs a 25bp cut are neck and neck. 50.5% believe we'll see a 50bp cut and 49.5% believe we'll see a 25bp cut. 

Seems the talk about an emergency rate cut we heard from some economists on Monday was coming from a place of fear instead of rational thinking. After last week, I highly doubt the market sees an emergency rate cut from the Fed.