Macro Update

• • The FOMC reduced the Federal Funds target rate by 50 bps to 4.75% - 5.00%, its first cut since 2020. While the market had anticipated a rate cut, the size of the cut was uncertain leading up to the meeting. The jumbo-sized cut confirmed the Fed’s shift in focus to supporting the labor market.
    
  • Nonfarm payrolls added 142,000 jobs in August and the unemployment rate ticked down 0.1% to 4.2%, results which were roughly in-line with expectations.
    
  • Inflation surprised modestly to the upside but not enough to upset the current disinflation trend. Core CPI, driven by an acceleration in rent costs, held steady at a 3.2% 12-month rate.
    
  • The Chinese government announced a series of aggressive policy measures meant to stimulate their long-struggling economy. The package exceeded expectations and the market’s reaction was overwhelmingly positive, with a sharp rally in Chinese equities immediately following the announcement.
    

Global Equity

• • Equity markets were positive in September, with emerging markets outperforming on the strength of China’s equity rally. US small caps lagged other broad equity indices in September, having lost some momentum following a surge as the market priced in a Fed policy pivot in recent months.
    
  • Performance over the last quarter has broadened out from the tech-focused US large caps that led in the first half of 2024 as large cap value, small caps, and non-US equities all outperformed the S&P 500 over the last three months.
    
  • Central bank policy easing, falling inflation, and China’s robust stimulus should help stabilize the global growth outlook and support equity markets. Valuations for US large caps remain lofty, leaving them vulnerable to sudden shifts in sentiment.
    

Global Fixed Income

• • US treasury yields continued to trend lower with the largest declines on the front end of the curve. The curve steepening reversed the previously inverted 2-year/10-year yield curve for the first time in over two years.
    
  • Fed Chair Jerome Powell has stressed that 50 bps cuts are not the new normal, suggesting traditional 25 bps moves are more likely going forward. The committee’s forward guidance calls for two more cuts in 2024, and market pricing currently reflects an aggressive pace of Fed easing over the next year.
    
  • Credit spreads ended the month modestly tighter as markets welcomed the Fed’s 50 bps cut, with IG spreads 4 bps tighter and HY spreads 10 bps tighter. Spread levels leave little room for further contraction, but corporate fundamentals are healthy and will benefit from lower rates.
    

Global Real Estate

• • Returns for core real estate in 2Q were negative as market values declined for the eighth consecutive quarter. However, more sectors turned positive this quarter as all property types except offices produced positive returns, with office demand continuing to struggle to adapt to post-pandemic work arrangements.
    
  • Cap rates have been under upward pressure in an environment of increased and sticky bond yields. With borrowing rates stabilizing and likely to fall, real estate transaction activity is picking up.