A Rate Cut Ahead in September: Was This Really News?
Contributed Opinion

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Did FedHead Jerome Powell really say anything so dramatically unexpected in his highly anticipated Jackson Hole speech? The market sure acted as though he did. Going into the confab, the Fed Funds futures, showing the implied market probability of a rate cut in September, had dropped to 70%, down from over 90% after the stunning payroll report at the beginning of the month.

And there was still a 100% expectation of a rate cut before the end of the year. That means that an overwhelming majority of the market were expecting a near-term rate cut before Powell opened his mouth.

Risks to Both Inflation and Employment

Without even committing to a rate cut, Powell talked about the dual mandate, the risks to higher inflation and higher unemployment, but concluded that the "stability of the unemployment rate" allows the Fed to proceed carefully in considering changes. In the headline quote said "the shifting balance of risks may warrant adjusting our policy stance."

Was any of this really new? And was any really unexpected?

I don't really think so. Not only did he not commit to a rate cut next month, he did not say that there would be several cuts before the end of the year, nor that the trend in rates had now changed. Certainly, the overall tone was not quite as bullish as it could have been (or as I was expecting): "yes, we'll probably cut in September to help the jobs market, but we will not allow inflation to get out of control", that sort of thing.

Things Deteriorating on Both Sides

The truth, of course, is that since he last Fed meeting press conference at the end of July, when Powell repeated his steady-as-she-goes-and-wait-for-the-date mantra, we have seen high CPI and higher PPI, and on the other hand, very weak jobs reports (including more massive downward revisions and rising continuing unemployment claims).

This had to have an impact on the man's thinking after his insistence as late as the end of July that the labor market remained "solid." The latest consumer spending report similarly showed signs of weakness, and that following the end-July comment that the consumer was healthy. Powell acknowledged that the downside risks to the labor market were increasing, even as inflation indicators were moving up.

He reiterated that "we can't allow a one-time increase in the price level to be an ongoing inflationary problem."

He Now Knows the Impact of Tariffs on Inflation

To me, the biggest change was his certainty now that tariffs would mean only a one-time increase in prices, contrary to his uncertainty less than a month ago. Maybe he has done some intensive reading and deep thinking on the subject in the past three weeks, but we certainly have not had the data in the meantime to provide certainty.

On the contrary, the Atlanta Fed has published a well-researched paper (I'm not saying that I agree with the conclusions) suggesting that the tariffs will touch off another bout of high inflation . . . a full-fledge inflationary impulse." But Powell said that the effects of tariffs on consumer prices "are not clearly visible" and repeated that there would most likely be only a "onetime shift" in the price level. This is significant, since the possible inflationary impact of tariffs was the main reason he gave a month ago for not cutting rates last month.

So, again, was anything really unexpected? Yet the markets reacted as though there had been a bolt from the blue. The S&P shot to new highs after drifting downwards for six days. While gold jumped $33, reversing the last nine days' losses. My own analysis suggests that this may be the last hurrah for the stock market before a correction in the fall, while gold may be about to break out again later in the fall. We shall discuss these hypotheses next week.

Altius Will Buy More of Its Shares, if Better Value Than M&A

Altius Minerals Corp. (ALS:TSX) has renewed its normal course issuer bid, allowing it to buy back shares in the market. The bid allows the company to repurchase just over 1.8 million shares, or just over 4% of the shares outstanding, over the next 12 months.

CEO Brian Dalton has made no secret of wanting to repurchase the company's shares, or what he calls "internal M&A", believing the company's shares to be undervalued, and better value than most external M&A. The company purchased no shares during recent months because of a self-imposed blackout while the process for a sale of the Arthur royalty was underway. We expect purchases to resume.

Altius is a core holding for us, providing broad exposure to the commodities sector. Top management, insightful and disciplined, a strong balance sheet, diversified assets, a strong pipeline add up to a great company. At this price, there is no need to be aggressive, but it can be purchased if you do not own.

More Strong Results at Fortuna's Next Growth Projects

Fortuna Mining Corp. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) reported strong drill results at two deposits on its flagship Séguéla Mine in Cȏte d'Ivoire. The results at Kingfisher and Sunbird following some spectacular results released last week from its Diamba Sud project in Senegal.

Drilling continues at both projects. Fortuna is a favorite intermediate, with solid management, a strong balance sheet, low costs, and exploration upside.

We are holding given the recent strong move in the stock price. But the stock remains good value, at less than 9 times free cash flow, for example, and can be purchased by investors building a gold portfolio.

TOP BUYS this week, in addition to above, include Kingsmen Creatives Ltd. (KMEN:SI).