Daily Brief - Is the Fed late?

TLDR: The Fed is behind the curve. Again. That’s not as tragic as it sounds because they’ll have a chance to catch up with a larger cut in September. And the economy isn’t exactly falling off the cliff. But momentum and many leading macro indicators are starting to suggest that a more aggressive easing will be necessary.

Take the labor market. After printing 250,000 per month last year, payrolls have come down into the mid-100,000 prints. Unemployment has woken up from the half-century slumber at 3.4% and is now hovering around 4.2%.

The uptick in the Unemployment Rate is particularly noteworthy because the pace of change (how fast the unemployment is rising) has been a pretty decent indicator of how likely the economy is to dip into a recession. No alarm bells yet but let’s just say it’s not all blue skies anymore. The chart below - where the main input is change in the unemployment rate - shows that the odds of a recession have risen meaningfully.

What next?

The Fed is now widely expected to cut rates at their meeting next week. They have signaled this intention in every forum, including against the spectacular mountainous backdrop of Jackson Hole. But how much?

Markets are pricing in 25 bps - the usual pace - as the most likely outcome but still placing about 10% probability on a larger, 50 bps cut. With a more benign inflation print this week, and some dark clouds on the horizon, a more aggressive cut would get the Fed back into the driving seat. After navigating the last few years quite deftly, it would be a shame to miss this opportunity.

Market Movers: When the Unemployment Rate rises

Here is the 1-month performance of S&P sectors following a rise in the US unemployment rate:

1. S&P Consumer Discretionary: 1.67%
2. S&P Technology: 1.26%
3. S&P Financials: 1.08%
4. S&P Materials: 0.93%
5. S&P Health Care: 0.92%
6. S&P Consumer Staples: 0.91%
7. S&P Industrials: 0.90%
8. S&P Real Estate: 0.80%
9. S&P Telecom: 0.14%
10. S&P Utilities: -0.02%
11. S&P Energy: -0.11%

Earnings Spotlight: AI competition heating up

Shares of Adobe dropped over 8% in premarket trading following a disappointing quarterly earnings forecast, raising concerns that returns from its AI-driven design initiatives may take longer to materialize.

Despite heavy investments in AI image and video generation to maintain its competitive edge against rising startups like Stability AI and Midjourney, Adobe's projected fourth-quarter revenue of $5.50 billion to $5.55 billion fell short of analysts' expectations of $5.61 billion. The company anticipates a quarterly profit between $4.63 and $4.68 per share, narrowly missing the $4.67 estimate. If the current trend continues, Adobe could lose over $21 billion in market value.

However, the company remains optimistic about exceeding its annual net new annual recurring revenue (NNARR) expectations, signaling strong subscription growth.