Whiplash, worries and white noise

Portfolio Manager Jack Janasiewicz, CFA^®; Portfolio Strategist Garrett Melson, CFA^®; and Investment Strategist Brian Hess discuss how the combination of slowing inflation and a cooling US labor market could impact the amount and size of Fed rate cuts in the weeks and months ahead. They believe:

• Inflation should be less of a concern going forward, with just a handful of items still contributing, including housing and motor vehicle insurance.
• Shelter disinflation is continuing to work its way through the system, and Core PCE (Ex-Shelter) is now basically in line with the Fed’s 2% target. 
• The labor market is cooling, a byproduct of full employment, but is not leading to a recessionary environment. 
• The recent uptick in unemployment is more of a normalization, and the Fed will now be shifting away from the inflation side of the dual mandate to focus on the labor side. 
• The Fed is likely to begin cutting rates shortly and should veer away from restrictive policy to something more neutral. We should see a number of 25 basis point (bp) cuts in here over the next few meetings, but could certainly see a 50bp cut because there's plenty of cover on the inflation-risk front for the Fed to move more aggressively. 
• The US consumer remains in good health with solid household balance sheets and aggregate incomes still growing at a 5% clip, which is above average. 
• The Mag 7 is down almost 10% since July 16 vs. the rest of the 493, which is telling as to what the broader market has been able to do. We believe broader participation will be a theme that continues as Mag 7 earnings growth comes back down to Earth and the 493 start to catch up.