Soft Patch Getting Softer. Is That Raising Odds of Fed Rate Cut in September & Stock Market Meltup?

Last week and this week have been good ones for the recession camp of economists. Indeed, the Atlanta Fed's GDPNow tracking model's estimate of real GDP growth during Q2-2024 dropped from a robust 3.0% on June 26 to half as much today. The Citigroup Economic Surprise Index is the most negative it has been since August 2022 (chart).

We are still in the soft-patch camp. So we've been thinking that the Fed doesn't need to cut the federal funds rate (FFR) this year. We might change our minds on Friday, if June's employment report confirms the latest batch of weak economic indicators. Stocks have already started to discount this scenario as both the S&P 500 and Nasdaq rose to new record highs today. Investors are counting on the Fed Put, i.e., the Fed will avert a recession by lowering interest rates.

We may have to raise our S&P 500 target for the end of this year and also our subjective probability of a 1990s-style meltup. For now, let's review today's batch of data, which was weak across the board:

(1) Jobless claims. Weekly initial unemployment claims rose 4,000 to 238,000 (sa) in the week ended June 29, while continuing claims rose 26,000 to 1.858 million, the highest since November 2021 (chart). The Bureau of Labor Statistics (BLS) may not be properly adjusting the data for summertime seasonal factors that have arisen since the pandemic. Still, further material increases in these series would signify that the jobs market is starting to deteriorate rather than just normalize, as we've been thinking.