Siegel Urges Fed to Cut Rates—Is It Time?

The Week in Review

Weekly Market Recap: U.S. and Canada

If you’ve been looking for evidence that you can’t read a book by its cover, here you go! Take a casual glance at this week’s chart of index returns and you’d swear it was a great week. Other than Wednesday’s drop, the lines slope to the right the whole way. Lower left and higher right generally means it was a good week.

What this chart doesn’t tell us, though, is where those same lines ended last week. That, of course, is far above Monday’s opening level as we opened the week with the biggest sell-off in nearly two years.

On Monday, the S&P 500 dropped 1.6%, the TSX was down 1.2%, the Dow Jones lost 1.3% and the Nasdaq Composite fell nearly 2.1%. So, the bar was set low right out of the gate.

So ya, by the end of the week all indices ended up either slightly up or slightly down, not a bad result considering how we started.

S&P 500 Returns | Week At-a-Glance

TSX Returns | Week At-a-Glance

Major Economic Stories This Week

Canada’s Unemployment Rate Holds Steady

Canada's unemployment rate remained unchanged at 6.4% in July, defying expectations of a slight increase to 6.5%.

Despite this, the labor market showed signs of weakness, with a second consecutive decline in net employment and a drop in the labor force participation rate to its lowest level in over two decades, excluding pandemic-related disruptions. While the number of unemployed decreased, this was largely due to fewer people actively seeking work.

• Unemployment rate remained at 6.4%.

• Labor force participation rate dropped to 65%.

• Unemployment rose for young men to 16%.

• Core-aged women’s unemployment fell slightly to 4.9%.

Employment in Canada Disappoints in July

Even though Canada’s unemployment rate stayed the same, we saw a huge miss in actual employment numbers. Employment for the month of July was down by 2,800 workers, coming in way below the forecast of 22,500.

Full full-time jobs increased, but we saw a sharp decline in part-time positions. Specific sectors like retail and finance experienced losses, while public administration and transportation saw gains.

• Employment fell by 2,800 in July

• Full-time jobs increased by 62,000, while part-time jobs were down by 64,000.

• Wholesale and retail trade saw a decline of 44,000 jobs.

• Ontario gained 22,000 jobs, while Manitoba lost 5,400 jobs.

US Jobless Claims Below Market Expectations

In the US, unemployment benefit claims dropped by 17,000 to 233,000 for the period ending August 3, beating market expectations. However, the overall job market shows signs of softening, with the moving average of claims hitting a yearly high. The outstanding claims also rose to the highest since November 2021.

• Initial jobless claims fell by 17,000 to 233,000.

• Four-week moving average rose to 240.75K.

• Outstanding claims reached 1,875K, the highest since November 2021.

• Claims dropped notably in Michigan and Texas.

Key Takeaways From this Week’s Economic News

Employment Decline in Canada

The decline in overall employment in Canada, especially in part-time positions, could be a signal that we're seeing a shift in labor market dynamics.

In particular, when we see this discrepancy between full-time and part-time employment, it might be reflecting a changing workforce demand or economic uncertainty, which could lead to potentially weaker consumer spending and by extension, a cautious approach from businesses.

Stable Unemployment Rate Despite Softening Labor Market

The stable unemployment rate at 6.4%, despite falling employment, emphasizes the significant drop in the labor force participation rate. This reduction could point to more people leaving the workforce due to retirement, discouragement, or other factors, which might mask the true extent of job market weakness. A declining participation rate can strain economic growth, reducing the potential for consumer spending and overall economic productivity.

US Jobless Claims Indicate Ongoing Labor Market Softness

The drop in US jobless claims to 230K, while better than expected, still reflects a labor market that is cooling down. The rise in the four-week moving average suggests persistent challenges in the job market, even as headline numbers improve. This could indicate that while layoffs have slowed, the hiring rate has also cooled, which may weigh on future economic growth prospects if the trend continues.

THIS WEEK’S POLL QUESTION
(Results in Next Week’s Newsletter)

✅ Answered More Issues to Come

“It only makes sense that things will slow substantially with interest rates being so high for a while now. It takes a while for the impact of the higher rates to trickle through the economy and we are seeing that start now.”
- premierdentsolutions

THE ECONOMY
Jeremy Siegel Urges Aggressive Fed Rate Cuts, Warns of Policy Mistakes

Key Points:

• Economist Jeremy Siegel argues that the Federal Reserve should cut interest rates quickly.

• Siegel criticizes Fed Chair Jerome Powell for being too cautious and slow in decision-making.

• Siegel suggests a 50-basis-point rate cut is necessary to correct past policy errors.

• Market expert Ed Yardeni disagrees, labeling Siegel’s stance as "overly alarmist."

Economist Jeremy Siegel is calling for the Federal Reserve to take swift and significant action to lower interest rates, arguing that the current rates are "far too high" and could lead to further economic missteps. In a recent interview with BNN Bloomberg, Siegel, a finance professor emeritus at the Wharton School and senior economist at WisdomTree, criticized the Fed for being too slow in cutting rates and warned that this cautious approach could be another policy mistake.

He expressed concern that the Fed's reluctance to reduce rates, despite the unemployment rate slightly exceeding the Fed’s target, is "very puzzling."

Siegel advocates for a substantial rate cut, suggesting that interest rates should be reduced by at least 50 basis points to bring them to around 4%. He argues that Fed Chair Jerome Powell’s cautious and deliberate approach is slowing down necessary economic adjustments and says "The deliberateness of his thinking is too slow.”

Lack of Emergency Action Expected

While Siegel sees the need for immediate action, he doesn't anticipate an emergency rate cut, noting Powell's cautious approach. Instead, he calls for the Fed to send a clear message that it is ready to lower rates as rapidly as it raised them to correct past errors.

Contrasting Opinions on Rate Cuts

Not everyone agrees with Siegel’s assessment. Ed Yardeni, a seasoned market analyst and head of Yardeni Research Inc., described Siegel’s comments as "overly alarmist." Yardeni acknowledged that the Fed might cut rates soon, but likely only once this year. He emphasized that the upcoming economic data would likely show that the economy is still on track, reducing the urgency for aggressive rate cuts.

Yardeni also suggested that the Fed would likely push back against calls for rapid or emergency cuts, arguing that there is no need to bow to pressure from Wall Street or alarmed economists like Siegel.

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THE BANK OF CANADA
Bank of Canada's Concerns Over Labor Market

Key Takeaways:

• Bank of Canada expected to cut rates at each remaining meeting in 2024

• Weak U.S. job market influencing Canadian policy

• Canadian bond yields falling

• Potential rebound in Canadian housing market

The Bank of Canada is increasingly worried about a weakening job market and its potential impact on economic recovery. Leading up to the July 24 rate cut, the central bank highlighted concerns that labor market issues could slow down growth.

As inflation eases, the focus has shifted to the risk of falling short of the 2% inflation target.

Prospects for Further Rate Cuts

The bank’s key interest rate is currently at 4.5%, but further cuts could be on the horizon if the economy continues to struggle. The next decision is set for September 4. Royce Mendes, managing director at Desjardins, noted that central bankers felt a stronger urgency to reduce rates, citing "material risks" such as mortgage renewals and labor market challenges.

Economic Outlook and Rate Cut Expectations

The Canadian economy has managed to avoid a full-blown recession despite high interest rates, but signs of fragility are evident. Unemployment rose to 6.4% in June, and the upcoming July labor force survey will offer more insight into the job market.

Mendes expects the Bank of Canada to continue cutting rates into 2024, possibly reducing the key rate to 2.25% by late 2025. Governor Tiff Macklem emphasized that there is no "predetermined path" for future rate cuts as the bank seeks to balance growth and inflation.

LEGAL PT. 1
Landmark Ruling Against Google's Market Dominance

Key Takeaways:

• Google ruled to have an illegal monopoly on online search.

• U.S. Justice Department's major victory in antitrust case.

• Google paid billions to secure default status on smartphones.

• Next steps include potential company breakup or other remedies.

A U.S. federal judge has determined that Google unlawfully maintained a monopoly over online search and related advertising, marking a pivotal victory for antitrust authorities in their battle against Big Tech's market dominance. The ruling, issued by U.S. District Judge Amit Mehta, concludes that Google has abused its position to secure its control of approximately 90% of the online search market and 95% of searches on smartphones.

Strategic Payments to Maintain Dominance

One of the most striking revelations from the case was that Google paid $26.3 billion in 2021 alone to ensure its search engine remained the default option on smartphones and browsers, effectively shutting out competition. Judge Mehta highlighted the value of being the default search engine, emphasizing that any potential competitor would need to spend billions to even attempt to challenge Google's dominance.

This financial barrier, he noted, protects Google's bottom line, with the loss of such agreements potentially leading to significant financial losses for the company.

Future Implications and Remedial Trial

The ruling sets the stage for a second trial that will explore potential remedies, which could include breaking up Google or forcing it to stop its practice of paying for default search engine status. Although Google has the opportunity to appeal, this decision marks the first significant antitrust victory against Big Tech in recent years.

LEGAL PT.2
Musk's X Forces Shutdown of Advertising Watchdog GARM

Key Takeaways:

• GARM, an ad-industry nonprofit, shuts down after a lawsuit from Elon Musk’s X.

• The lawsuit claims GARM conspired to withhold billions in advertising from X.

• GARM denies wrongdoing but couldn’t sustain operations due to the lawsuit.

• The case highlights growing tensions between Musk and advertisers.

Elon Musk's X, formerly known as Twitter, has successfully forced the closure of a major ad industry watchdog, the Global Alliance for Responsible Media (GARM). This comes after X filed a lawsuit accusing GARM of illegally conspiring to boycott advertising on the platform. GARM, a nonprofit initiative aimed at preventing ads from appearing alongside harmful content, announced its dissolution just days after the lawsuit was filed.

Despite shutting down, GARM confirmed its intention to continue defending itself in court.

Lawsuit Details and Defendants

The lawsuit from X, owned by Musk, claimed that GARM organized a collective effort to withhold billions in advertising due to concerns that X had strayed from brand safety standards after Musk's acquisition in 2022. The suit named four major companies—CVS, Unilever, Mars, and Ørsted—as defendants.

It’s possible that this aggressive legal strategy may backfire, potentially alienating more advertisers from the platform. Nandini Jammi and Claire Atkin, founders of the watchdog group Check My Ads Institute, wrote that the lawsuit only underscores how risky advertising on X has become.

Background and Implications of GARM’s Closure

GARM was established in 2019 following the Christchurch Mosque shootings in New Zealand, where a terrorist attack was livestreamed on social media, leading to concerns about ad placement next to harmful content. Since its founding, GARM claimed it reduced such ads from 6.1% in 2020 to 1.7% in 2023.

INVESTING (SORT OF)
Trump Media Reports Significant Financial Loss

Key Takeaways:

• Trump Media reported a $16 million net loss for the recent quarter.

• Revenue dropped 30% to $836,900, compared to $1.2 million in the same quarter last year.

• Legal expenses and IT costs contributed to the losses.

• Despite the losses, Trump Media claims a strong balance sheet with no debt.

Trump Media, the social media company owned by former President Donald Trump, reported a net loss of over $16 million for the latest financial quarter. This comes as the company, which operates the Truth Social app, saw its revenue decline sharply by 30%, dropping from $1.2 million last year to just $836,900 this quarter.

Contributing Factors to Financial Losses

The company attributed the substantial loss, which is slightly less than the $22.8 million loss from the same period in 2023, primarily to legal costs associated with its merger with Digital World Acquisition Corp. Trump Media stated that approximately half of the quarter’s losses were due to these legal expenses. Additionally, the company incurred $3.1 million in IT consulting and software licensing fees, largely related to the launch of its new TV streaming service, Truth+.

The report also highlighted a change in revenue-sharing agreements with an advertising partner, which Trump Media said was intended to stabilize the company’s financial position before its planned business combination. The company noted that its revenue has been fluctuating as it tests a new advertising initiative on Truth Social.

Financial Health and Future Prospects

Despite these challenges, Trump Media emphasized its strong financial position, ending the quarter with $344 million in cash and no debt. The company believes this solid balance sheet will support the continued expansion and improvement of its streaming platform, Truth+.

Market Performance and Political Context

Meanwhile, Trump Media’s stock, trading under the DJT ticker, has taken a hit, closing at $26.21 per share, a significant drop from its high of over $71 per share earlier in the year. The company’s current market capitalization stands at nearly $5 billion, a high valuation given its modest sales.

ECONOMICS & THE FED
Trump Advocates Presidential Influence on Federal Reserve

Key Takeaways:

• Donald Trump argues for presidential input on Federal Reserve interest rate decisions.

• Trump criticized Fed Chair Jerome Powell and suggested potential changes if elected.

• The Fed's independence is a key issue, with opponents stressing its importance.

• Trump’s Democratic opponent, Kamala Harris, supports Fed independence.

Form president Donald Trump has stirred debate by suggesting that the U.S. president should have a say in the Federal Reserve's decisions on interest rates.

Speculation of Federal Reserve Reforms

Trump’s comments have heightened speculation about potential reforms to the Federal Reserve if he wins the November election. According to reports earlier this year, advisors close to Trump are considering changes that would require the Fed to consult with the president before making rate decisions. Other proposals include involving the Treasury Department in overseeing the Fed's actions.

During his previous term from 2017 to 2021, Trump frequently clashed with Fed Chair Jerome Powell, whom he appointed in 2018. Trump criticized Powell’s timing on interest rate decisions, accusing him of acting too early or too late. "It’s sort of gotten it wrong a lot," Trump said, highlighting his belief that economic decisions should be driven by "a gut feeling."

Despite his past criticism, Trump maintained that he and Powell "get along fine." However, his team is reportedly considering replacing Powell or not reappointing him when his term as chair expires in 2026.

The Principle of Federal Reserve Independence

The Federal Reserve has traditionally operated independently of political influence, a principle that Fed officials, including Powell, have consistently defended. Trump’s Democratic opponent, Vice President Kamala Harris, supports this independence. An aide to Harris stated that the Fed should continue making decisions without presidential interference.

The Fed has faced scrutiny for its handling of interest rates, particularly for delaying rate hikes when inflation surged in 2021. Recently, some, including Senator Elizabeth Warren, have urged the Fed to lower rates as inflation cools. Between March 2022 and July 2023, the Fed raised benchmark interest rates by 5.25 percentage points to combat inflation, with markets now expecting potential rate cuts as early as September.

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