When To Expect The First Interest Rate Cut

The Fed hasn’t cut rates yet because it seems to be more concerned with the labour and stock markets than it is with the commercial property market.

According to market participants, the pressure is on the Fed to cut interest rates sooner rather than later but that hasn’t been enough to move the Fed’s hand. The Fed hasn’t cut rates yet because it seems to be more concerned with the labour and stock markets than it is with the commercial property market.

Commercial Property Market Woes

The commercial property market is screaming for reduced rates as CLO delinquencies rise steadily, this sentiment is also echoed in commercial office space buildings. Commercial office space is selling at a massive discount in many cities across the United States as high rates have kept property investors off the table despite a ‘return to office’ employment trend. The following are some commercial office space building sales in 2024:

264k square foot office building in Ohio: $2.4 million
164k square foot office building in downtown Minneapolis: $3.8 million
290k square foot office building in downtown Baltimore: $4 million (starting bid)

These 2 sales and 1 prospective sale bid show just how down and out commercial office space properties have become; all of which have sold (or are selling) for at least a 70% discount from their previous sale price. Market participants can continue to track these prices with the Green Street Commercial Property Price Index (CPPI).

A Strong Labour and Stock Market

The United States can’t help but add more jobs as each of the 3 non-farm payroll reports in 2024 have showed job growth well ahead of market expectations. However, there are some cracks in the labour market that are starting to show as the unemployment rate ticked up slightly to reach 3.9% in February. The move was surprising as continuing claims have more or less remained unchanged since the start of the year. On the other hand, the stock market has been as hot as ever, up over 10% YTD with margin debt soaring. The most recent margin debt figure for February showed a 5.8% gain to hit $742.96 billion which marked an 18-month high.

One of the following sentiments are true, or even both:

Market participants are utilizing high amounts of margin in their trading because they believe interest rates will be coming down soon (lowering their carrying costs), AND/OR
Market participants are utilizing high amounts of margin in their trading because they believe the gains in the stock market will outpace the carrying costs of their margin debt over the next 12 months.

So either interest rates are coming down sooner rather than later, or the stock market is going to extend a massive rally in 2024, or both. Based on the margin debt figures, we have to think it’s a bit of both.

So When Are Interest Rates Coming Down?

As of right now, according to trading in interest rate futures, there’s a 65.9% chance of a rate cut at the Fed’s meeting in June. Looking forward to July, rate futures are showing an 81.6% chance of a rate cut which could be perceived as all but guaranteed. Market participants will likely be speculating on the likelihood of the June rate cut when making portfolio moves and betting the farm on the July rate cut as probabilities would suggest. In the interim the commercial property market will likely continue to deteriorate and the unemployment rate could have some buoyancy going into the summer.