Welcome to Thoughts on the Market.
I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley.
Today, the narrow economic path the markets face as we come back from summer.
It's Thursday, September 4 at 2 p.m. in London.
September is a month of change and won my favorite times of the year.
The weather gets just a little crisper.
Kids go back to school.
Football, both kinds, are back on TV.
And financial markets return from the summer in earnest, quickly ramping back up to full speed.
This year, September brings a number of robust debates that we'll be covering on this podcast.
But chief among these might be exactly how strong or not investors actually want the economy to be.
You see, at the moment the Federal Reserve is set to lower interest rates and they're set to do that even though inflation in the US is still well above target and it's moving higher.
That's unusual.
And it's maybe even more unusual in the context of financial conditions being very easy and the US government borrowing a historically large amount of money.
The Fed's reason to lower interest rates, despite strong markets, elevated inflation and high budget deficits, is the concern that the US labor market is weakening.
And this fear is not unfounded.
US job growth has recently slowed sharply.
In 2023 and 2024, the US was adding on average about 200,000 jobs every month.
But this year, job growth has been less than half that amount, just 85,000 per month.
And the most recent data is even worse.
Tomorrow brings another important update.
But here's the rub.
The Fed in theory is lowering rates because the labor market is weaker.
Markets would like those lower rates.
But investors would not like a significantly weaker economy.
And this logic is borne out pretty starkly in history.
When the Fed is lowering interest rates as growth holds up, that represents some of the best ever market environments, including the mid-1990s.
But when the Fed lowers rates as the economy weakens, well, that represents some of the worst.
So, as the leaves start to turn and the air gets a little chilly, this is the fine line that markets face coming back into September.
Weaker data for the labor market would make it easier to justify fed cuts, but would make the broader backdrop more historically challenging.
Stronger data could make the Fed look off sides, committing to lower interest rates despite high in rising inflation, easy financial conditions and what would be a still resilient economy.
And that could unleash even more aggressiveness and animal spirits.
Stock markets might like that aggressiveness, but neither outcome is great for credit.
And so, by process of elimination, our market is hoping for something moderate, belt high and over the middle of the plate.
Our economists forecast for this Friday's jobs report for about 70000 jobs in a stable unemployment rate would fit that moderate bill.
But for this month, and now for the rest of the year, we'll be walking a narrow economic path.
Thank you, as always, for your time.
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