Why Louis Navellier is eyeing a December rate cut … what are traders thinking? … the data Louis believes support cuts … what we’re hearing from Fed members … how to resolve the disconnect

Is it time to start talking about rate cuts?

…in December?

Legendary investor Louis Navellier thinks so.

On Monday, Louis updated his Platinum Growth Club subscribers on his outlook for the Federal Reserve/interest rates as we head into 2024.

Let’s pick up with Louis discussing last Wednesday’s Fed meeting:

As I expected, the Fed kept key interest rates at current levels. But more importantly, the Fed also released a dovish FOMC statement.

For example, it included comments on how a runup in long-term interest rates have weighed on economic activity. In addition, the FOMC still thinks that inflation is “elevated,” but, also in its best doublespeak, acknowledged that inflation is cooling.

Wall Street decisively concluded after the FOMC statement that the Fed is done raising key interest rates, and that sparked a massive market rally.

 
After walking readers through the market’s bullish performance over the past week, Louis shifts gears, zeroing in on the potential for rate cuts:

Following the November FOMC meeting, pressure will be mounting on the Fed to begin cutting key interest rates in 2024.

I should also add that the federal funds rate is now higher than the 10-year Treasury yield, which declined over 40 basis points intraday last week.

So, a key interest rate cut in December is now a possibility.

***If we get a December rate cut, it will result in the mother of all stock market rallies

I write this because a cut in December isn’t in Wall Street’s current forecast. So, such a surprise would result in frantic bullish repositioning from traders.

We can see what Wall Street traders are anticipating by looking at the CME Group’s FedWatch tool. It shows us the probabilities that traders are assigning to various interest rate ranges at upcoming FOMC meetings.

As you can see below, traders are putting 90.4% odds on the Fed maintaining its current target rate of 5.25% – 5.50% in December. The remaining 9.6% odds are that we’ll get a quarter-point increase.

As we’ve pointed out before in the Digest, what moves stock prices in the short-term are sudden surprises to expectation. So, with a December cut nowhere on the radar for traders, if the Fed was to deliver one, we would see enormous market fireworks.

***The data Louis is watching that could move the Fed

The Fed has told us repeatedly that it is data dependent – what we’re seeing in the economy will drive its policy decisions. This is where Louis sees the door being cracked for rate cuts sooner than Wall Street’s current expectation.

For more on this, let’s go to Louis’ Weekly Profit Guide yesterday in Accelerated Profits:

Due largely to persistently high interest rates, a big economic deceleration is forecast.

The Atlanta Fed even revised its fourth-quarter GDP estimate down to a 1.2% annual pace last week.

The revision came on the heels of some weak jobs data. ADP reported that only 113,000 private payroll jobs were created in October, below economists’ estimates for 130,000 jobs.

The Labor Department revealed only 150,000 jobs were created last month, which was significantly below estimates for 180,000 jobs.

Louis also points toward the August and September payrolls. They were revised lower by a cumulative 101,000 jobs. And the unemployment rate rose to 3.9% in October, compared to 3.8% in September.

Here’s Louis’ takeaway from all the data:

The fact is that both reports were consistent with a soft economic landing, as well as signaled that the Fed cannot raise key interest rates further.

The Fed may actually need to start cutting key interest rates sooner rather than later. A December rate cut could be back on the table.

Now, though this December rate cut is “back on the table,” that’s not Louis’ going expectation – I’ll reveal that shortly. But first, let’s look at this situation from the other perspective.

***What’s the Fed’s position on rate cuts, and is it just a poker face?

We’ll begin with commentary from Federal Reserve Chairman Jerome Powell in his press conference last Wednesday.

When asked about the timing of rate cuts, Powell replied:

The fact is the committee is not thinking about rate cuts right now at all. We’re not talking about rate cuts. We’re still very focused on the first question, which is “have we achieved a stance of monetary policy that’s sufficiently restrictive to bring inflation down to 2% over time, sustainably?” That is the question we’re focusing on.

The next question, as you know, will be “for how long will policy remain restrictive?” And what we’ve said there is that we’ll keep policy restrictive until we’re confident that inflation is on a sustainable path down to 2%. That’ll be the next question.

But honestly, right now, we’re really tightly focused on the first question. The question of rate cuts just doesn’t come up because I think it’s so important to get that first question as close to right as you can.

If the Fed is, in fact, having closed-door discussions about a rate cut, then Powell picked the wrong career. He should be making millions by playing on the World Series of Poker Tour.

Though Powell was vague about the timing of the first rate cut, other Fed presidents have provided more specificity.

Beginning with Atlanta Federal Reserve President Raphael Bostic, a few weeks ago, he said, “I would say late 2024.”

Then, yesterday, we heard from Minneapolis Fed President Neel Kashkari.

From MarketWatch:

Asked in an interview on Bloomberg about “a feeling in the market” that the bar to cut interest rates was not as high now as it was previously, Kashkari replied: “I have no idea where market participants are getting that. There’s no discussion amongst me and any of my colleagues about when we’re going to start preparing to cut rates.”

As a counterpoint, Bloomberg interviewed several analysts to get their take on this apparent hawkishness. Here’s one perspective:

…As Renaissance Macro’s Neil Dutta pointed out, just because Fed officials aren’t considering rate cuts behind closed doors doesn’t preclude them from doing so in the near future. He sees the potential for surgical cuts next year despite persistent inflation in the economy…

He waved away Kashkari’s no-cuts-under-discussion insistence.

“To me, the fact that they’re not talking about it is irrelevant,” he said.

***Louis had his own perspective on Kashkari’s comments, and it sets the stage for when Louis expects the first rate cut

From Louis in yesterday’s Accelerated Profits Flash Alert:

One thing Neel [Kashkari] said that even the media hasn’t mentioned much is that the Personal Consumption Expenditures Index – the core rate – is running only at 2.5% for the last three months.

Neel made it very clear the Fed has to get down to a 2% inflation rate, and they have to hold rates high until they get there. But they’re encouraged.

So, I think it was refreshing to have a spokesperson from the Fed be so upbeat.

Louis went on to discuss other topics in his podcast, but eventually returned to the timing of rate cuts.

Here’s his bottom line:

I think we’re getting there, folks. They won’t cut rates in December, but it looks like they will be cutting rates in January or February. We just have to give them the data to do so.

And it’s coming. Because if you look at the inflation charts, we’re going to be cutting off some big gains from 12 months ago, and that just naturally lowers the annual rate.

So, it’s time to cheer up and be happy.

If Louis is right, the apparent disconnect between the Fed’s hints about cuts that remain far out on the horizon and Louis’ “just around the corner” timing is simple…

The Fed may not be discussing cuts today, but when they finally receive the data they want, they’ll give us a rate cut immediately rather than dragging out the process. And Louis thinks that data will arrive early in 2024.

One thing is for sure: If we’re in for our first rate cut in January or February, the market will be very happy indeed.

We’ll keep you updated here in the Digest.

Have a good evening,

Jeff Remsburg