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In this issue:
- Global Equity Market Performance
- Expectations Then
- Today’s Fed
- Expectations Now
- Bonds
- August So Far
- Wrapping Up
Global Equity Market Performance
Canada was the leader in July as the S&P/TSX 60 gained 1.8% for the second month in a row. MSCI EAFE was the next best at plus 0.6%. The S&P 500 was down slightly, minus 0.1%. The worst performer was MSCI Emerging Markets, down 7.4%.
Last month we highlighted the heavy country concentration of Taiwan and Korea in the MSCI EM index due to the oversized weighting of chip makers. The iShares Taiwan ETF (EWT) and MSCI South Korea ETF (EWY) were down 11.1% and 22.2% respectively.
As of this writing—the second week of August—our systems are indicating positive momentum in all four equity markets.
If you would like to stay current on our measures of trend and momentum in the markets we follow, please click here.
This letter looks at the recent history of interest rates and market expectations.
Expectations Then
Last August, the Federal Funds Rate—the Federal Reserve’s target overnight interest rate—stood at 4.50%.
Note: In what follows, we refer to the upper limit of the target range.
In our September 2025 letter we noted that interest rate expectations had shifted after then-Fed Chair Powell signalled at the Kansas City Fed’s Jackson Hole Economic Symposium on August 22 that rates were likely going lower.
Before Jackson Hole, the interest rate futures market had priced zero probability of a cut of 50 basis points (bps) in September 2025. After the conference, the probabilities shifted to a higher chance of easing: 90.1% for 25 bps and 9.9% for 50 bps.
In September 2025 the Fed cut the rate 25 bps to 4.25%. It followed with another 25 bps cut to 4.00% in October and a further 25 bps to 3.75% in December, where the rate remains today.
Today’s Fed
On May 22, Kevin Warsh took office as the chairman of the Federal Reserve. The first Federal Open Market Committee (FOMC) meeting he chaired was in June. The vote to maintain the current rate was unanimous. But what did change is that the standard statement issued to the public was much shorter than those under Powell’s leadership.
There were no indications of “forward guidance,” a central bank communication technique that has existed in various forms since the 1950s, despite Prime Minister Carney’s recent comments about his role in its development.
Regardless, Warsh is ditching the idea and has indicated that the Fed will be less communicative than it has been in the past.
Subsequently, Warsh has floated the idea that there are too many FOMC meetings each year and he would like to reduce the number in the future.
This might be disappointing to the large number of analysts and pundits whose job seems to depend on what the Fed is doing or saying. The idea behind this obsession is, if you are an expert in “Fedspeak” — the sometimes-opaque language of the Federal Reserve — you could theoretically manage risk better than someone who doesn’t understand that dialect.
But as we’ve said before, even if you knew something was going to happen, economically or politically, the market often has different ideas. You can be right and still lose money.
Jackson Hole has, at times, been the venue where Fed Chairs offer clues as to their thinking on where interest rates are going. The next one is in a few weeks, from August 27 to 29. It will be interesting to see if Warsh will stick to his implied preference for less communication.
We are not in the business of parsing the meaning of FOMC statements or governors’ speeches. As we’ve said before, there is an industry built around selling stories on Bay Street and Wall Street. We’re not buyers. We’ve learned that most of it doesn’t matter to our investment process.
We value prices over opinions. So what does the market currently expect the Fed to do at the next meeting?
Expectations Now
Last summer the market got it right. It was priced for a cut and that’s what happened.
Let’s look at how rate expectations have shifted since Warsh became Fed Chair.
The CME Group’s FedWatch tool uses 30-day interest rate futures prices to calculate the implied odds of a rate change at each upcoming FOMC meeting.
As of August 17, the odds of a rate hike are 33.1%. Just prior to Warsh taking the helm at the Fed, those odds were zero. And as recently as the first week of August they were 67.2%.
The odds have moved around sharply, but the market is still assigning a meaningful probability to a September hike.
We may know more after Jackson Hole. But if Warsh is true to his word, the market might have to figure it out on its own.
Let’s look at what has happened to the ten-year Treasury yield since the Fed began easing in 2024.
Bonds
The yield on the ten-year Treasury is one of the most important prices in financial markets. Trillions of dollars in interest-rate derivatives, mortgages and other financial products are tied to it.
The Fed attempts to influence interest rates in general, but they can only directly control the overnight rate.
From March 2022 to July 2023 the Fed increased its target rate from 0.25% to 5.50%. They maintained that level until September 2024, when they cut 50 bps to 5.00%.
What stands out is this. Just before the Fed began cutting rates in 2024, the 10-year Treasury yield had fallen to 3.60%, its lowest level since the hiking cycle ended. It has not moved below that since. The yield is now 4.72%, 112 bps above that level, while the Fed’s target rate is 175 bps lower.
The takeaway is that even if you’re a Fed guru, there’s a good chance you still won’t know what the bond market is going to do. Or stocks, for that matter.
For investors with balanced portfolios, bonds as a diversifier have helped dampen volatility, but not much else.
We’ll see, but perhaps there’s an outside chance a hike next month brings some stability to longer-term bond yields. Rate cuts certainly haven’t helped.
August So Far
These aren’t actually August events, but they’re close enough. In last month’s letter we said we would try to avoid further AI coverage unless something whacky happens. Something did.
On July 30, Microsoft—previously an AI winner turned loser—became a winner again, rising 15%. The next day Amazon gained 15% while Apple fell 7%.
These were extraordinary moves for some of the largest companies in the world. In each case the market’s reaction was tied to the effects of AI on their business results.
A few days later, August 5, Shopify closed more than 16% higher after stronger-than-expected earnings and management commentary. While not near the magnitude in an absolute sense relative to the three giants above, Shopify ranks among the top three companies by market capitalization in Canada.
As of today, August 17, the S&P/TSX 60 is up 3.6% month to date and the S&P 500 3.4%.
Wrapping Up
Much of the above is just observation—an update that explores somewhat surprising developments. Rates in the U.S. are down, but that depends on where you look. Over the past few months, since the new Fed Chair took office, the market has priced in decent odds of a rate hike in September, when there was essentially no chance before.
The story in Canada is somewhat similar. Since the Bank of Canada started easing in June 2024, it has lowered the overnight target from 5.00% to 2.25%. The Government of Canada 10-year bond yield has barely moved. It was around 3.50% then and is about 3.65% now.
Looking at the short-term futures market in Canada, there doesn’t seem to be an expectation of imminent rate hikes. We’ll see how the Bank reacts to whatever our neighbours down south end up doing.
None of this means much from the perspective of managing risk in our portfolios. But it’s worth paying attention to what the market is trying to tell you.
As Yogi Berra said, “You can observe a lot by just watching.”
Enjoy the rest of the summer and stay tuned.
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