Fed Signals Rate Cut, Credit Concerns Rattle Wall Street

Fed Policy and Labor Market - The Fed is focusing on the labor market and is expected to cut rates, potentially by 25 basis points in October, to achieve full employment [2][5] - Market participants anticipate the Fed will cut rates, with the two-year yield serving as an indicator of future Fed policy [3] - The market is pricing in a terminal funds rate of around 3%, aligning with estimates of a neutral rate, but there's downside risk if the economy softens [11][12] - The Fed's focus on the labor market weakness suggests a path towards lowering the federal funds rate, but cautiously, in increments of 25 basis points [6] - Tariffs are estimated to contribute about 10% to the current inflation rate, with the remaining impact expected over the next two to three quarters [50] Credit Market and Risk Assessment - Concerns about credit quality are emerging, with J P Morgan CEO Jamie Dimon warning of potential future credit problems, likening them to "cockroaches" [28][31] - Despite concerns, the investment-grade credit market shows resilience, supported by strong technicals and consistent inflows [33][34] - Investment-grade credit markets are experiencing 24 straight weeks of inflows, driven by attractive yields, while high-yield markets saw outflows [34][35] - Spreads between investment-grade banks and the rest of investment grade are relatively flat, indicating strong performance by big banks, but investors are advised to be cautious [38][39] Economic Outlook and Market Dynamics - The U S remains the best-performing country in terms of growth globally, despite trade war concerns with China [16][17] - The dollar's exposure has been somewhat hedged away, and foreign demand for U S assets, including corporate mortgage bonds, remains strong [16]