Investors may have to prepare for disappointment if they expect a sharp turnaround in interest rates this year, says Torsten Slok of Apollo.
In an interview with Bloomberg TV, the chief economist dismissed the likelihood of multiple rate cuts this year, saying he believes the economy is strong enough to only need one cut in September before the Federal Reserve pauses until the end of 2024. Rate cuts are made to stimulate the economy, and he believes the U.S. is in a position where only one cut will be needed to achieve that.
Slok said the latest unemployment and retail data supported that assumption, as both numbers signaled that “everything is fine.”
Encouraging indicators included restaurant and hotel reservations, weekly corporate outage data and releases from retailers such as Target, Walmart and TJ Maxx, he said.
Earnings strength and improved forecasts for the latter were particularly encouraging for Wall Street, reflecting robust consumer demand. In July, retail sales posted their biggest jump in over a year, with sales rising 1% compared to forecasts of 0.3%.
“The whole story that we are slowing down is just not clear from the data,” Slok said.
Still, investors expect multiple rate cuts. According to the CME FedWatch tool, there is a 67.5% chance that rates will be cut 25 basis points next month before falling further this year.
This belief stems from concerns that interest rate policy has become too restrictive in light of better-than-expected unemployment figures in July.
Although the report briefly shook the markets and caused recession fears to skyrocket, unemployment figures fell again to a five-week low by mid-August.
Meanwhile, revised non-farm employment data for the period April 2023 to March 2024 were better than expected on Wednesday, with only 818,000 jobs not created – and thus not the estimated downward revision of one million.
“The last time the Fed raised interest rates was in July 2023, and even today, twelve or thirteen months later, we are still waiting for the economic data to slow down, and it is not happening in any significant way,” Slok said.
Although he has long believed there would be no rate cut this year, Slok now acknowledged that the Federal Reserve will make the 25 basis point cut next month.
After that, however, the central bank will continue to pursue its “wait-and-see approach,” he said.
“I understand that the markets want, in quotes, a slowdown in the economy, and we are so addicted to the Fed’s narrative that interest rates need to be normalized,” he said. “But we still have plenty of time to normalize interest rates.”
Market veteran Ed Yardeni shares this view and expects next month’s employment report to be significantly better than July’s.
