Wednesday's Markets Update (September 18, 2024)

19 Sep 2024 by rate3

On Wednesday, stocks finished lower after the Fed cut rates by 50 basis points. While the initial market reaction was positive—during which the S&P hit a new ATH (5692)—Powell's comments tempered optimism. Overall, investors remain cautious despite the aggressive rate cut, as the Fed hinted at a slower pace of future cuts. Tech stocks, including Nvidia, Microsoft, Oracle, and AMD, declined, while Apple gained. Internationally, many smaller central banks, which are overly dependent on the dollar in their oil trade, such as Saudi Arabia, the UAE, Bahrain, Qatar, and Kuwait, cut their rates in unison with the Fed by 25 to 50 basis points. BTC jumped above $61K but quickly retreated due to short-lived investor optimism about the Fed's jumbo rate cut, while ETH remained unperturbed.

Details

The Fed cut interest rates by 50 basis points to 4.75%-5%, marking the first rate reduction since the pandemic. They forecast further rate cuts in the coming years to slow inflation. While inflation projections were lowered, economic growth forecasts were slightly reduced. The unemployment rate is expected to rise slightly. Interest Rate Projection - 1st Yr 3.4%; 2nd Yr 2.9%; 3rd Yr 2.9%; Longer 2.9%. 1Y trend: "Up" (Fed)
Building permits increased in August, reaching a five-month high. Multi-family and single-family permits both rose, with the Midwest seeing the largest increase. The West was the only region with a decline. 1Y trend: "Down" (Census)
Housing starts in the US rebounded in August, increasing by 9.6% from the previous month (ATH 29.30, July 1982; ATL -26.40, March 1984). This follows a revised decline of 6.9% in July. The annualized rate of housing starts reached 1.356 million units in August. 1Y trend: "Up" (Census)

Crypto

Bhutan has secretly amassed significantly more BTC than El Salvador, making it a major player in the crypto space. While El Salvador has been publicly embracing BTC, Bhutan has quietly accumulated 13,029 BTC (compare to 2,381 BTC accumulated by El Salvador), valued at over $758 million. This revelation highlights Bhutan's growing influence in the crypto world and suggests a broader trend of nations adopting cryptocurrency. (source)

World Markets

Eurozone inflation slowed to a two-year low (2.2% from 2.6%) in August, primarily due to lower energy prices. Core inflation also declined slightly (2.8% from 2.9%). Most major economies saw inflation rates decrease with a sharp drops observed in Germany (2% vs 2.6%) and France (2.2% vs 2.7%), but a few smaller countries experienced increases (Latvia, Malta, Finland and Slovakia). The ECB forecasts inflation to remain above its target for the next few years. 1Y trend: "Down" (EC)
The Central Bank of Brazil raised its interest rate by 25 basis points to 10.75% in September after more than a year-long cuts (reducing the rate from 13.75% to 10.5%). This decision was in line with expectations and aimed to address inflation concerns. The stronger-than-expected economy and labor market, along with rising inflation projections, prompted the rate hike. Future rate adjustments will depend on inflation trends and economic conditions. 1Y trend: "Down" (BCB)
Ghana's economy grew at its fastest pace (+6.9%) in five years in Q2 2024, driven by growth in services, industry, and agriculture. The gold sector continued to expand growing by 23.6% for the third consecutive quarter, while cocoa production declined. Ghana is recovering from a debt restructuring and is implementing IMF austerity measures. (GH)

Currencies

The dollar index fell to a July low (100.4) after the Fed announced a larger-than-expected rate cut. While the cut was expected, the central bank hinted at further easing, causing the dollar to weaken against major currencies. However, Fed Chair Powell emphasized that the central bank is not in a hurry to cut rates. 1Y trend: "Side"

Commodities

Gold prices surged to a new record high (2594) after the Fed cut interest rates by 50 basis points, marking the first rate cut in over four years. The Fed also signaled plans for further rate reductions by the end of the year. 1Y trend: "Up"

Comment: What's Up With Argentina?

Introduction

Argentina's economic narrative in 2024 has been a mixture of remarkable stock market performance and troubling macroeconomic indicators. While the Merval, Argentina's main stock market index, surged by 885,999 points—or an impressive 95.30%—since the beginning of the year, other crucial economic factors tell a more complex tale.

Stock Market Surge vs. Economic Contraction

The stock market's meteoric rise stands in stark contrast to Argentina's GDP dynamics. The GDP contracted by 1.70 percent in the second quarter of 2024 compared to the previous quarter, highlighting a troubling economic environment. Historically, Argentina's GDP growth rate averaged a modest 0.46 percent from 1993 until 2024, with significant fluctuations. It peaked at 10.94 percent during the third quarter of 2020 but suffered a shocking decline of -13.95 percent in the second quarter of the same year.

This juxtaposition raises an essential question: How can the stock market thrive amid a contracting economy? One possible explanation is that the stock market often serves as a forward-looking indicator, reacting to investor sentiment and external factors rather than the immediate economic landscape. It also suggests that certain sectors may be experiencing growth, even as the broader economy struggles.

Rising Unemployment Amid Economic Fluctuations

Another critical aspect of Argentina's economic condition is the unemployment rate, which rose to 7.7% in the first quarter of 2024. This figure represents a rise from the previous low of 5.7%, which had been the lowest in over two decades. Comparatively, the unemployment rate reached a staggering record of 20% at the beginning of the 2000s. Increasing unemployment during a stock market boom indicates that the benefits of the market's success are not being evenly distributed across the population.

Inflation Dynamics

Inflation in Argentina has been a longstanding challenge, with consumer prices skyrocketing by 236.7% in August 2024 alone. This figure marks the fourth month of disinflation, a welcome development compared to the steep increase of 263.4% in July. Historically, the inflation rate in Argentina has averaged 190.49% from 1944 to 2024, with a peak of a staggering 20,262.80% in March 1990. The volatility of inflation reflects the broader economic instability that affects many sectors of the economy and significantly undermines consumer confidence, which has remained suppressed, often staying below 50.

Central Bank Policies and Challenges

In response to slowing inflation, Argentina's central bank decreased the benchmark interest rate from 50% to 40% on May 15, 2024. This reduction is notable, as it marks the sixth adjustment since December, placing rates at their lowest since June 2022. Traditionally, interest rates in Argentina have been exceedingly high, often exceeding 32% prior to 2022. The high rates are influenced by the tussle between populist governments that increase spending and monetary authorities striving to control inflation.

The interplay of these factors perpetuates a cycle of mistrust among the populace. With a legacy of oscillating between capitalism and socialism over the decades, Argentina's citizens find themselves increasingly skeptical of governmental efficacy, leading to a surge in interest in cryptocurrencies as an alternative financial strategy.

The Need for Governance Reform

The complex economic landscape in Argentina highlights the urgent need for a governance structure that prioritizes decentralization and rationalization of powers. Continuous fluctuations and inconsistencies in policy, coupled with high inflation and unemployment, have resulted in a lack of confidence among citizens. Addressing these issues is critical for fostering a stable and sustainable economic environment.

Conclusion

Argentina serves as a prime example of the struggles faced by nations attempting to navigate between competing economic ideologies. The stark divergence between a booming stock market and a contracting economy, rising unemployment, and persistent inflation illustrates the challenges inherent in such a landscape. Ultimately, without significant reforms and a shift towards greater decentralization, Argentina risks remaining trapped in a cycle of economic uncertainty, consumer distrust, and missed opportunities for sustainable growth.