Lecture du week end…
The key takeaways today:
- What is the Federal Reserve likely to do next?
- How China’s slowdown will affect the global economy
- How much will US house prices rise in 2025?
- Long-term AI bets could require investors to be patient
- The technology divide among US small businesses
- Briefings Brainteaser: Which cloud computing-related sectors are least likely to adopt AI?
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More consecutive Fed rate cuts expected
The US Federal Reserve cut its benchmark policy rate by 50 basis points on Wednesday to 4.75%-5%. That’s more than the 25-basis-point reduction Goldman Sachs Research economists had anticipated.
“We see 50 basis points as the right move in light of the good inflation news and the risk of further labor market softening,” writes David Mericle, chief US economist at Goldman Sachs Research.
The Fed leadership appears to have pushed through a larger cut even though many participants seemed to indicate that they preferred a smaller cut based on their submissions to the central bank’s economic projections, or dot plot. “The rationale for the larger cut and the key theme of the meeting was the shift in focus from inflation risks to employment risks in light of the recent softening in the labor market data,” Mericle says.
The greater urgency suggested by Wednesday’s cut of 50 basis points, and the acceleration in the pace of cuts that most participants projected for 2025, makes a longer series of consecutive cuts the most likely path, according to Goldman Sachs Research. Our economists revised their Fed forecast to accelerate the pace of cuts next year. They now expect a longer string of consecutive 25-basis-point cuts from November 2024 through June 2025, when the funds rate would reach their terminal rate forecast of 3.25-3.5% (versus their previous forecast of consecutive cuts this year but quarterly cuts next year).
Read the full report from Goldman Sachs Research.
In a separate note to clients, Nikhil Choraria, head of European Flow Rates Trading, writes that the larger-than-expected cut “is a clear statement of intent that the Fed does not want to be behind the curve.” The stock market’s recent correction, and financial markets’ pricing in of emerging rate cuts from the Fed, suggests the markets believe policymakers may have indeed been falling behind, he writes.
The Fed’s dot plot of economic projections indicates that most officials expect 100 basis points of total cuts this year, and the median dot implies another 100 basis points of rate cuts in 2025. Choraria points out that the Fed’s dot plot is conditional and has been made at a time of high uncertainty, given the US election in November, intensified geopolitical tensions, and evolving trade tariffs that are likely to affect the economy.
It would be a mistake to think the market should price in exactly what the Fed’s dot plot shows, Choraria writes, “because the bar to stopping rate cuts is very high but the bar to cutting 50 is very low.” He adds: “It’s data dependent — there’s no preset path — a position we are likely to hear repeatedly over the coming weeks. But any sign of an undershoot of inflation or labor market wobbles could quickly lead to a faster cutting cycle.”
In case you missed it: Listen to our Markets podcast episode on what the Fed’s rate cut means for investors.
Why China’s economy is struggling
After a stronger-than-expected start to the year, China’s economy is showing signs of weakening as the world’s second-largest economy continues to struggle with a real estate downturn, slowing consumer spending, and geopolitical tensions. The ongoing property woes are still likely to take several more years to play out, and while exports have been a bright spot in the economy, the risks of higher tariffs could hurt exports and growth overall, says Goldman Sachs Research’s Hui Shan, chief China economist, on Goldman Sachs Exchanges.
The cause of China’s deteriorating growth will determine how much the slowdown weighs on the global economy. If the slowdown is driven by housing and consumption, then the impact on the rest of the world “would be pretty straightforward,” says Shan. It would be “negative for iron ore imports by China from Australia and Brazil and [result in] fewer purchases of luxury goods from European countries by Chinese consumers,” Shan adds.
"If the trade war is at the center of why the Chinese economy is slowing, then by our global economists’ estimates, global growth will slow, global inflation will pick up, and the dollar will strengthen,” says Shan. “So that will have a very different set of implications on the global economy and markets.”
US house prices are forecast to rise more than 4% in 2025
Goldman Sachs Research raised its forecast for US home price appreciation to 4.5% this year and 4.4% in 2025, up from previous estimates of 4.2% and 3.2% respectively in April. The revised outlook has much to do with the loosening in the labor market, which our analysts believe will give the Fed additional clearance to cut rates.
The strongest growth in home prices, in the year to date, has occurred primarily in three parts of the US: the midwest, including cities like Chicago and Cleveland; the northeast, including New York and Boston; and California, especially San Diego. Our researchers expect California home prices to increase substantially over the next two years, with some cities like San Jose rising as much as 10% over the next 12 months.
Will higher prices mean that homes will remain unaffordable for a large portion of the population? Likely in the short-run, but not necessarily in the long-run, says Goldman Sachs Research analyst Vinay Viswanathan. While it’s true that home affordability is the worst on record, going back to the early 1980s, Viswanathan sees a path where rising incomes and lower borrowing costs could improve the situation.
AI buildout could require investor patience
Eric Sheridan (R), senior research analyst with Goldman Sachs Research, at Goldman Sachs’ Communacopia + Technology conference
Sentiment toward generative AI has recently turned much more skeptical, with some investors questioning whether tech companies’ investments will pay off. According to Eric Sheridan, the senior research analyst covering the US Internet sector within Goldman Sachs Research, this is an understandable development.
“If you go back and look at almost every computing cycle we’ve been through — and I’ve been an investor or an analyst through a number of them — there’s a product that captures imagination, there’s a build cycle, and then there’s always a bit of disillusionment on the time between the build cycle and applications that have utility,” Sheridan says on the sidelines of Goldman Sachs’ Communacopia + Technology conference. “We could be entering a period where there’s extended and outsized volatility, because of a lack of linearity or visibility around where technology is going over the medium to long term.”
Sheridan acknowledges that “much more is unknown than known right now,” but he adds that in his opinion, the promise of generative AI is not overblown. “Betting on the long term in technology seems to have worked out over very long periods of time — but you do need some patience.”
The technology adaptation gap among small businesses
Rural small businesses appear to be falling behind in technology adoption. Fewer than half (47%) of rural small businesses use AI tools, compared to 57% of their non-rural counterparts, according to a new survey by Goldman Sachs 10,000 Small Businesses (10KSB).
The survey, which polled more than 2,200 10KSB graduates, reveals that rural small businesses may see their competitiveness threatened as a result of their lag in tech adoption, particularly as AI tools become increasingly common.
This finding compounds an acute, preexisting digital divide. Rural small business owners were three times more likely to report that they lack affordable, reliable high-speed internet compared to non-rural ones (12% vs. 4%). However, this is still progress; last year, 19% of rural small business owners said they lacked access to affordable, reliable high-speed internet.
Read the full Goldman Sachs 10KSB report, "Rural Small Businesses: Facing Unique Challenges."
Briefings Brainteaser: AI in the cloud
The global cloud computing market is expected to soar to $2 trillion by 2030, according to Goldman Sachs Research. Among cloud-related firms, computing, data, and web hosting companies are most likely to adopt AI within the next six months. Which of these sectors is least likely to adopt AI in that same time period?
A) Educational services
B) Real estate
C) Motion pictures and sound recording
D) Performing arts and spectator sports
Check the answer here.
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CNBC Sep 18
Goldman Sachs’ chief US economist: More Trump tariffs could spur more rate cuts (2:07)
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