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Markets are counting on the Fed to head off recession with sizeable interest rate cuts

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Federal Reserve Chairman Jerome Powell takes a question from a reporter during a news conference following a Federal Open Market Committee meeting at the William McChesney Martin Jr. Federal Reserve Board Building on July 31, 2024 in Washington, DC. 

Andrew Harnik | Getty Images

In the market’s eyes, the Federal Reserve finds itself either poised to head off a recession or doomed to repeat the mistakes of its recent past — when it was too late seeing a coming storm.

How Chair Jerome Powell and his cohorts at the central bank react likely will go a long way in determining how investors negotiate such a turbulent climate. Wall Street has been on a wild ride the past several days, with a relief rally Tuesday ameliorating some of the damage since recession fears intensified last week.

“In sum, no recession today, but one is increasingly inevitable by year-end if the Fed fails to act,” Steven Blitz, chief U.S. economist at TS Lombard, said in a note to clients. “But they will, beginning with a [half percentage point] cut in September telegraphed in late August.”

Blitz’s comments represent the widespread sentiment on Wall Street — little feeling that a recession is an inevitability unless, of course, the Fed fails to act. Then the probability ramps up.

Disappointing economic data recently generated worries that the Fed missed an opportunity at its meeting last week to, if not cut rates outright, send a clearer signal that easing is on the way. It helped conjure up memories of the not-too-distant past when Fed officials dismissed the 2021 inflation surge as “transitory” and were pressed into what ultimately was a series of harsh rate hikes.

Now, with a weak jobs report from July in hand and worries intensifying over a downturn, the investing community wants the Fed to take strong action before it misses the chance.

Traders are pricing in a strong likelihood of that half-point September cut, followed by aggressive easing that could lop 2.25 percentage points off the Fed’s short-term borrowing rate by the end of next year, as judged by 30-day fed funds futures contracts. The Fed currently targets its key rate between 5.25%-5.5%.

“The unfortunate reality is that a range of data confirm what the rise in the unemployment rate is now prominently signaling — the US economy is at best at risk of falling into a recession and at worst already has,” Citigroup economist Andrew Hollenhorst wrote. “Data over the next month is likely to confirm the continued slowdown, keeping a [half-point] cut in September likely and a potential intermeeting cut on the table.”

Emergency cut unlikely

With the economy still creating jobs and stock market averages near record highs, despite the recent sell-off, an emergency cut between now and the Sept. 17-18 open market committee seems a longshot to say the least.

The fact that it’s even being talked about, though, indicates the depth of recession fears. In the past, the Fed has implemented just nine such cuts, and all have come amid extreme duress, according to Bank of America.

“If the question is, ‘should the Fed consider an intermeeting cut now?’, we think history says, ‘no, not even close,'” said BofA economist Michael Gapen.

Lacking a catalyst for an intermeeting cut, the Fed is nonetheless expected to cut rates almost as swiftly as it hiked from March 2022-July 2023. It could start the process later this month, when Powell delivers his expected keynote policy speech during the Fed’s annual retreat in Jackson Hole, Wyoming. Powell is already being expected to signal how the easing path will unfold.

Joseph LaVorgna, chief U.S. economist at SMBC Nikko Securities, expects the Fed to cut rates 3 full percentage points by the end of 2025, more aggressive than the current market outlook.

“Go big or go home. The Fed has clearly said that rates are too high. Why would they be slow at removing the tightness?” he said. “They’ll be quick in cutting if for no other reason than rates aren’t at the right level. Why wait?”

LaVorgna, though, isn’t convinced the Fed is in a life-or-death battle against recession. However, he noted that “normalizing” the inverted yield curve, or getting longer-dated securities back to yielding more than their shorter-dated counterparts, will be an integral factor in avoiding an economic contraction.

Over the weekend, Goldman Sachs drew some attention to when it raised its recession forecast, but only to 25% from 15%. That said, the bank did note that one reason it does not believe a recession is imminent is that the Fed has plenty of room to cut — 5.25 percentage points if necessary, not to mention the capacity to restart its bond-buying program known as quantitative easing.

Still, any quakes in the data, such as Friday’s downside surprise to the nonfarm payrolls numbers, could ignite recession talk quickly.

“The Fed is as behind the economic curve now as it was behind the inflation curve back in 2021-2022,” economist and strategist David Rosenberg, founder of Rosenberg Research, wrote Tuesday. He added that the heightened expectation for cuts “smacks of a true recession scenario because the Fed has rarely done this absent an official economic downturn — heading into one, already in one, or limping out of one.”

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These are 3 big things we’re watching in the stock market this week

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A security guard works outside the New York Stock Exchange (NYSE) before the Federal Reserve announcement in New York City, U.S., September 18, 2024. 

Andrew Kelly | Reuters

The stock market bounce last week showed once again just how dependent Wall Street has become on the whims of the White House.

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These U.S. consumer stocks face higher China risks

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Apple iPhone assembly in India won’t cushion China tariffs: Moffett

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Street's biggest Apple bear says a production move to India is unrealistic

Leading analyst Craig Moffett suggests any plans to move U.S. iPhone assembly to India is unrealistic.

Moffett, ranked as a top analyst multiple times by Institutional Investor, sent a memo to clients on Friday after the Financial Times reported Apple was aiming to shift production toward India from China by the end of next year.

He’s questioning how a move could bring down costs tied to tariffs because the iPhone components would still be made in China.

“You have a tremendous menu of problems created by tariffs, and moving to India doesn’t solve all the problems. Now granted, it helps to some degree,” the MoffettNathanson partner and senior managing director told CNBC’s “Fast Money” on Friday. “I would question how that’s going to work.”

Moffett contends it’s not so easy to diversify to India — telling clients Apple’s supply chain would still be anchored in China and would likely face resistance.

“The bottom line is a global trade war is a two-front battle, impacting costs and sales. Moving assembly to India might (and we emphasize might) help with the former. The latter may ultimately be the bigger issue,” he wrote to clients.

Moffett cut his Apple price target on Monday to $141 from $184 a share. It implies a 33% drop from Friday’s close. The price target is also the Street low, according to FactSet.

“I don’t think of myself as the biggest Apple bear,” he said. “I think quite highly of Apple. My concern about Apple has been the valuation more than the company.”

Moffett has had a “sell” rating on Apple since Jan. 7. Since then, the company’s shares are down about 14%.

“None of this is because Apple is a bad company. They still have a great balance sheet [and] a great consumer franchise,” he said. “It’s just the reality of there are no good answers when you are a product company, and your products are going to be significantly tariffed, and you’re heading into a market that is likely to have at least some deceleration in consumer demand because of the macro economy.”

Moffett notes Apple also isn’t getting help from its carriers to cushion the blow of tariffs.

“You also have the demand destruction that’s created by potentially higher prices. Remember, you had AT&T, Verizon and T. Mobile all this week come out and say we’re not going to underwrite the additional cost of tariff [on] handsets,” he added. “The consumer is going to have to pay for that. So, you’re going to have some demand destruction that’s going to show up in even longer holding periods and slower upgrade rates — all of which probably trims estimates next year’s consensus.”

According to Moffett, the backlash against Apple in China over U.S. tariffs will also hurt iPhone sales.

“It’s a very real problem,” Moffett said. “Volumes are really going to the Huaweis and the Vivos and the local competitors in China rather than to Apple.”

Apple stock is coming off a winning week — up more than 6%. It comes ahead of the iPhone maker’s quarterly earnings report due next Thursday after the market close.

To get more personalized investment strategies, join us for our next “Fast Money” Live event on Thursday, June 5, at the Nasdaq in Times Square.

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