| | Close
Sep 18 | Close
Sep 11 | Weekly
Change | Net Weekly
Change % |
DJIA | 51,682.64 | 52.573.29 | -890.65 | -1.69% |
Nasdaq | 26,522.55 | 26,333.03 | +189.52 | +0.72% |
S&P 500 | 7,650.50 | 7,656.98 | -6.48 | -0.08% |
| S&P TSX | 35,806.65 | 35,697.49 | +109.16 | +0.31% |
Source: Globe & Mail
Fed Policy: Timelier Disinflation Wanted
Michael Gregory, CFA
BMO Deputy Chief Economist
The new tagline for policy rates is ‘higher for longer’. On September 16, the FOMC raised them by 25 bps, with the fed funds target range at 3.75%-to-4.00%, which was expected. This was the first hike since July 2023. And the decision was unanimous among the dozen voters, which was unanticipated. We were expecting to see at least one dissent in favour of keeping policy rates unchanged. Unanimity reveals, once again (recall 2022), that when inflation is deemed the ‘enemy at the gate’, policymakers, whether considered hawks or doves, rally around the price stability flag. The policy statement ended with: “Today’s policy action will support a timelier return to the Committee’s 2 percent goal. The Committee will deliver price stability.”
And to deliver it, the Committee’s consensus was that higher policy rates are required now, and that they should remain at higher levels for longer, compared to the consensus three months ago and according to the ‘dot plot’. Interestingly, there was no drop-off in dot plot participation (which was a bit surprising). Chair Warsh was again the sole non-participant, but his repeat performance failed to influence others. (One wonders what that may mean about his ability to influence other Fed matters.)
The median projection for the fed funds rate showed another 25 bp rate hike by the end of this year, a view shared by 12 of 18 participants. Two were content with ‘one and done’ while four called for another 50 bps of tightening before year-end. The median forecast showed no move next year and uarter point cuts in each of the following two years. Compared to the previous dot plot, by 2028, rates are 50 bps above where they were before. Not only is this higher for longer, but there was also a pinch of higher forever. The median call for the longer-run or ‘neutral’ level was still in the 3.00%-to-3.25% range, but it rose from near the bottom (3.0625%) to the top (3.25%).
Elsewhere in the Summary of Economic Projections, the other median forecasts showed multi-year themes of slightly stronger real GDP growth, slightly faster total and core PCE inflation, and slightly lower jobless rates, compared to the previous SEP. These changes were consistent with the shift in Fed policy.
In the press conference, Warsh was asked what had changed since the July 29 confab, when the hold-versus-hike vote was 9-to-3. What triggered the nine (including Warsh) to flip? Warsh said over the interim seven weeks, the “economy has strengthened”, the inflation trends “weren’t passing the test”, and geopolitics (read: oil prices) hadn’t improved. Essentially, already sticky inflation was risking getting stickier.
Last month, at the Jackson Hole Symposium, Chair Warsh stated his standard: “We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do.” Policymakers clearly lacked that confidence this week and the consequent “work” has begun.
Through this year and next, our Fed call is the same as the FOMC median (another 25 bps for a total of 50 bps this year and nada next year). However, we expect the 2.0% inflation goal for both the total and core PCE price indexes to be achieved as 2028 unfolds. In turn, for that year, we forecast fed funds returning to the neutral range and a total of 100 bps of Fed easing. But that’s two years from now, and a lot can happen between now and then.
Frank and Mark.
Source: Globe & Mail, BMO Capital Markets, Bank of Canada, Bloomberg.
Canada
The TSX added 0.3% last week, with broad gains across health care, consumer staples, energy and banks. Strength in energy and materials has helped Canadian equities outperform their U.S. counterparts by a modest margin over the past three months, and are still leading on a year-to-date basis—up 12.9% versus 11.8% for the S&P 500.
YTD, the TSX is up 12.91%, and the benchmark 10-year yield ended the week to yield 3.88%.
U.S. & Global
Equity markets were mixed last week as the Federal Reserve kicked off a new tightening cycle. The S&P 500 dipped 0.1%, with gains in health care and communication services offset by weakness in banks. Rate sensitives also continue to lag alongside higher Treasury yields—the 10-year pushed above 5% for the first time since the pre-financial crisis days of 2007. Utilities are now down just over 8% over the past three months, the worst performing sector in the S&P 500; while industrials and consumer discretionary are also lower. Higher yields have also taken some steam out of high growth areas of the market, like tech and communication services, where future earnings are now discounted at a higher rate. Energy, of course, has led the pack with a 20% gain over that period, with WTI oil prices holding above $100 last week.
Last week’s 25 bp Federal Reserve rate hike was widely expected and almost fully priced into the market, but it marks a new stage of the cycle. The statement was about as terse as we should now expect, effectively arguing that the economy is solid but inflation remains elevated—pretty straight-forward. Consensus among the FOMC dots was for one more 25 bp rate hike in 2026, and the market is fully pricing that in, and then some. Going further, 75 bps of further tightening in priced in by June of next year.
The interaction of Federal Reserve policy and the equity market is tricky to parse because early Fed tightening almost always causes an equity correction, but rarely derails the bull market. However, bull markets are almost always brought to an end by Fed tightening…eventually. In each episode of interest rate liftoff going back to the early-1990s, the S&P 500 has pulled back, with an average decline of 10% over roughly 3.5 months (see table). This is your garden-variety correction within a longer-lasting bull market. Indeed, in almost all cases, the S&P 500 is higher than pre-hike levels a year later (2022 took longer, but did get there), as those early rate hikes usually reflect strong economic and earnings growth, which keep the bull market supported. That appears to be the phase we’re in right now.
YTD, the DJIA is up 7.53%, the NASDAQ is up 14.11%, and the S&P 500 is up 11.76%. The 10-year Treasury yield ended the week to yield 5.01%.
Source: BMO Capital Markets
The Good:
Global Investors bought a net $20.7 bln in Cdn. securities (July); Mortgage Credit steady at 4.0% y/y (July)
The Bad:
Consumer Prices stuck at an elevated +3.0% y/y (Aug.); Industrial Product Prices +13.5% y/y; Raw Materials Prices Index +22.8% y/y (Aug.); Manufacturing Sales Volumes -1.4% (July); Wholesale Trade Volumes -0.6% (July); Existing Home Sales -6.9% y/y (Aug.); MLS Home Prices -3.0% y/y; New Home Prices -2.0% y/y (Aug.); Housing Starts -0.1% to 29,046 a.r. (Aug.); Building Permits -17.3% (July); New Motor Vehicle Sales -2.1% y/y (July)
The Good:
Retail Sales +1.2% (Aug.); Initial Claims -10k to 196k (Sep.12 week); Philly Fed Index +0.6 pts to an ISM-adjusted 58.1 (Aug.); Pending Home Sales +0.3% (Aug.); Global Investors bought a net $40.6 bln in U.S. Securities (July)
The Bad:
Import Prices +7.0% y/y (Aug.); Industrial Production inch (Aug.)—and manufacturing -0.3%; Housing Starts -2.6% to 1.275 mln a.r. (Aug.); Building Permits -2.7% to 1.394 mln a.r. (Aug.); NAHB Housing Market Index -3 pts to 32 (Sep.); Empire State Manufacturing Survey -1.7 pts to an ISM-adjusted 53.7 (Sep.); Leading Indicator -0.1% (Aug.)
Source: Associated Press
A truck driver built a model of NYC with over 800,000 structures for fun. Now it’s a museum exhibit
NEW YORK (AP) — For more than two decades, truck driver Joe Macken spent his free time building a massive scale model of his native New York City out of balsa wood and foam board.
When he finished, his daughter convinced him to show off the sprawling basement creation — encompassing over 800,000 structures — on TikTok. The video clips almost immediately went viral.
Now Macken’s model is on display at the Museum of the City of New York, which reached out to him after seeing his TikTok videos gain more than 10 million views in one week. “He Built This City,” as the exhibit is called, opened in February along Manhattan’s museum row near Central Park. It runs through Oct. 12.
“I never really thought about finishing it because I had so much fun building it,” he said on a recent visit to the exhibit.
The museum’s chief curator, Elisabeth Sherman, said the model is a rare piece that appeals to both social media followers and traditional museum goers.
“I think people always want to get their arms around this whole city, this city that is impossible to know, impossible to grasp, and this is a way to see it from a bird’s-eye view,” she said. “We rarely have anything these days that reaches everyone in that way. We love that kind of energy it brings.”
All five boroughs and parts of New Jersey and suburban Long Island are laid out in street-level detail across more than 300 large foam boards, interconnected like puzzle pieces. The entire model is 50 feet long (15 meters) and nearly 30 feet (9 meters) wide, with each inch on the model representing about 160 feet (49 meters).
The more than 800,000 structures are mostly made out of light balsa wood, from Manhattan’s towering skyscrapers to the humble single-family homes in Queens and landmarks such as the Statue of Liberty, Yankee Stadium and the Brooklyn Bridge.
Macken says the inspiration for the model goes back to an elementary school trip to the Queens Museum to see the Panorama of the City of New York, the famed scale model built for the 1964-1965 World’s Fair, complete with an overhead, helicopter-style gondola ride.
But it wasn’t until he was in his 40s that the Queens native actually set out to make it. At the time, Macken and his young family had just moved north, from Long Island to the Albany area in upstate New York.
“I think, subconsciously, I might have missed New York,” he said.
Using basic materials found at hobby shops, Macken started with the Rockefeller Center and its iconic main tower, “30 Rock.”
From there, he built out Midtown Manhattan, a process that took about a decade. The Empire State Building and its ornate Art Deco spire proved to be the most challenging part.
“I wanted to make it perfect,” Macken said. “People are gonna be looking at it.”
Macken has no background in model building, architecture or design. He jokes that the closest experience he had was building Legos and Lincoln Logs as a kid. But as he worked, Macken became faster and more efficient.
“I wish I would have done it 20 years earlier, knowing that I would have enjoyed it so much,” he said. “I can build one of the buildings in my sleep right now where it took me hours when I first started.”
Macken says nearly all his free time was spent on the model. He’d bring his materials on family trips to the New Jersey shore in the summer and during lulls driving a bus on weekends.
“It was just something that I couldn’t stop doing,” he said.
As the model neared completion, it became all-consuming, Macken said.
“Before bed, I’d be so tired sometimes, and I wind up being there for four hours, falling asleep at the table,” he said. “It got bad. It was an obsession. It still is.”
The model isn’t an exact snapshot of the modern metropolis. Out in miniature Queens, Macken recreated his favorite childhood diner, not the modern high rise that now stands there. He also kept the old Kosciuszko Bridge that connects Brooklyn and Queens, even though it was demolished in 2017 and replaced by a new span.
And in lower Manhattan, the old twin towers of the World Trade Center still stand sentry in Macken’s miniature Gotham, albeit alongside One World Trade Center and the other gleaming skyscrapers constructed after the 2001 terror attacks.
“I kept a lot of my own parts of the city,” Macken said. “Just for me.”
On a recent weekday morning, a steady stream of visitors ambled into the first floor gallery. They strode up to the edge of the raised platform, seeking out a familiar landmark or an old neighborhood.
Some took up the pairs of binoculars provided for better viewing, while most simply squinted and pointed into the distance.
Jonathan Skolnik positioned himself at the corner of the model nearest lower Manhattan and began tracing his family’s history across the five boroughs as his son, Tosha, listened intently.
Jonathan pointed out his father’s first address in America, on Manhattan’s Lower East Side, near the foot of the Williamsburg Bridge. The neighborhood where he was born in Queens. The cemetery where many family members were buried.
“I’m trying to do it all from memory,” the Washington, D.C. area resident said. “I don’t have it all exact.”
After a lifetime toiling away in anonymity, Macken hopes to display the model elsewhere when the museum exhibit ends on Columbus Day.
In the meantime, he’s looking forward to adding more than 50 new buildings and expanding the model into New Jersey and Long Island.