Tag: Economy

Jamie Dimon’s Candid Warning on U.S. Fiscal Deficit

Posted on by slightbourne@noblecapitalmarkets.com

In a recent interview, Jamie Dimon, the CEO of JPMorgan Chase, issued a stark warning to the United States regarding its fiscal deficit. Dimon’s stern warning has significant ramifications, not only for policymakers but also for investors closely monitoring economic trends and government policies that can influence market dynamics and investment strategies.

Dimon’s primary concern revolves around the rapid escalation of the fiscal deficit, which currently stands at a staggering 6% of the nation’s GDP. This surge is largely attributable to the extensive measures implemented during and after the COVID-19 pandemic, including interest rate hikes, tax cuts, and massive stimulus programs. While these actions were intended to buoy the economy during turbulent times, Dimon cautions that their long-term consequences, if not counterbalanced by fiscal discipline, could be detrimental.

A prominent issue highlighted by Dimon is the potential impact on inflation. Unchecked deficit spending can fuel higher inflation rates, eroding the purchasing power of investors and consumers alike. Inflation trends are closely watched by investors, as they can influence interest rates, asset prices, and overall investment strategies. Moreover, a ballooning deficit can signal underlying economic imbalances, potentially necessitating corrective measures in the future that could disrupt investment portfolios.

Moreover, Dimon’s remarks shed light on the broader economic outlook. A ballooning deficit can signal underlying economic imbalances and may necessitate corrective measures in the future. For investors, this underscores the importance of staying informed about macroeconomic indicators and government fiscal policies that can shape investment opportunities and risks.

Dimon’s call for addressing the deficit resonates with the broader theme of fiscal responsibility in investment strategies. Investors often seek opportunities in sectors or assets less vulnerable to fiscal uncertainties or inflationary pressures. Diversification across asset classes and regions can also mitigate risks associated with policy changes. Furthermore, Dimon’s commentary underscores the interplay between government policies and market dynamics, as policy decisions, such as deficit reduction efforts, can shape market sentiment, investor confidence, and long-term economic stability.

Furthermore, Dimon’s commentary touches on the relationship between government policies and market dynamics. Investors are mindful of how policy decisions, such as deficit reduction efforts, can influence market sentiment, investor confidence, and long-term economic stability. Understanding these interconnections is crucial for making informed investment decisions.

Beyond fiscal matters, Dimon’s advocacy for respectful dialogue and understanding across political divides is noteworthy. Political stability and consensus on economic policies can contribute to a favorable investment climate. Investors value predictability and clarity in policy frameworks, as they provide a foundation for long-term planning and investment allocation.

In conclusion, Jamie Dimon’s warning regarding the U.S. fiscal deficit carries significant implications for investors. It underscores the importance of fiscal responsibility, the potential impact on inflation and market dynamics, and the value of informed decision-making in navigating economic uncertainties. As investors evaluate opportunities and risks, staying attuned to developments in fiscal policy and economic trends will remain paramount in shaping investment strategies.

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Fed’s Preferred Inflation Gauge Stubbornly High at 2.8%, Locking in Higher Rates

Posted on by slightbourne@noblecapitalmarkets.com

Inflation in the United States showed alarmingly little signs of cooling in March, according to the latest data on the Federal Reserve’s preferred price gauge released Friday. The stubbornly elevated readings essentially guarantee the U.S. central bank will need to keep interest rates higher for longer to fully constrain persistent price pressures.

The core personal consumption expenditures (PCE) price index, which strips out volatile food and energy costs, rose 2.8% in March from a year earlier, the Commerce Department reported. This matched February’s annual increase and exceeded economists’ expectations of 2.7%.

On a month-over-month basis, the core PCE climbed 0.3% in March, in line with projections. The headline PCE price index including food and energy costs also rose 0.3% for the month and was up 2.7% annually.

The data highlights the challenges the Fed is facing in its battle to bring inflation back down to its 2% target after it surged to multi-decade highs last year on supply shocks, robust demand and pandemic-driven disruptions. Price pressures have proved remarkably persistent, defying the central bank’s aggressive interest rate hiking campaign that kicked off in March 2022.

“Inflation reports released this morning were not as hot as feared, but investors should not get overly anchored to the idea that inflation has been completely cured and the Fed will be cutting interest rates in the near-term,” said George Mateyo, chief investment officer at Key Private Bank. “The prospects of rate cuts remain, but they are not assured.”

The fresh PCE readings follow worse-than-expected inflation figures in Thursday’s GDP report that revealed the personal consumption expenditures price index surged at a 3.4% annualized rate in the first quarter. That was well above the 2.7% forecast and offset a decent 1.6% rise in economic growth over the same period.

The persistent inflation pressures backed bets that the Fed will likely leave interest rates unchanged at the current 4.75%-5% range at its next couple of meetings in June and July. According to the CME Group’s FedWatch tool, traders now see around a 44% probability that the central bank could implement two quarter-point rate cuts by the end of 2023.

However, most analysts agree that the Fed would need to see clear signs that consistently high inflation is beginning to dent the still-robust labor market before feeling confident about pivoting to an easing cycle. Policymakers want to avoid making the same mistake of prematurely loosening monetary policy like they did in the 1970s, which allowed inflation to become deeply entrenched.

For investors, the path forward for markets hinges on whether the Fed can achieve a so-called “soft landing” by getting inflation under control without sparking a severe recession. Equity traders largely looked past Friday’s inflation data, with futures pointing to a higher open on Wall Street. But Treasury yields edged lower as traders increased bets on the Fed ultimately reversing course next year.

Still, the latest PCE figures underscore the Fed’s dilemma and the likelihood that interest rates will need to remain restrictive for some time to prevent inflation from becoming unmoored. That raises the risks of overtightening and potential economic turbulence ahead as the full impact of the most aggressive tightening cycle since the 1980s hits home.

Markets on Edge as Inflation Jitters Spark Volatility

Posted on by slightbourne@noblecapitalmarkets.com

The red hot U.S. economy has financial markets caught between fears of overheating versus overtightening, leading to a tense environment of volatility and angst. U.S. stocks fell sharply on Tuesday, reversing early gains, as investors grew nervous ahead of this week’s critical inflation report that could help shape the Federal Reserve’s policy path.

All eyes are on Wednesday’s March Consumer Price Index (CPI) data, with economists forecasting headline inflation accelerated to 3.4% year-over-year, up from 3.2% in February. The more closely watched core measure excluding food and energy is expected to ease slightly to 3.7% from 3.8%.

The CPI print takes on heightened importance after a slate of robust economic data has traders quickly recalibrating expectations for Fed rate cuts this year. At the start of 2024, markets were pricing in up to 150 basis points of easing as worries about a potential recession peaked. But those easing bets have been dramatically pared back to just around 60 basis points currently.

The shift highlights how perspicacious the “no landing” scenario of stubbornly high inflation forcing the Fed to remain restrictive has become. Traders now only see a 57% chance of at least a 25 basis point cut at the June FOMC meeting, down from 64% just last week.

“Given the strength of the economic data, it’s getting easier and easier to defend the notion that we might be closer to an overheating economy than one nearing recession,” said Dave Grecsek at Aspiriant. “At the moment, three rate cuts this year seems a little demanding.”

Tuesday’s market turmoil underscored this increased skittishness around the inflation trajectory and its policy implications. Major U.S. indices fell, with the Dow Jones Industrial Average dropping 0.38%, the S&P 500 off 0.32%, and the Nasdaq Composite declining 0.17%.

The sell-off was broad-based, impacting many of the high-growth tech leaders that have powered the market’s gains so far in 2024. Megacap growth stocks including Nvidia, Meta Platforms, and Microsoft fell between 0.2% and 2.9%. Financial stocks, among the most rate-sensitive sectors, were the worst performers on the day with the S&P 500 Financials index down 0.8%.

The heightened volatility and economic uncertainty has been particularly punishing for the small and micro-cap segments of the market. These smaller, higher-risk companies tend to underperform during turbulent periods as investor appetite for risk diminishes. The Russell 2000 index of small-cap stocks fell 1.2% on Tuesday and is down over 5% from its highs just two weeks ago.

Cryptocurrency and blockchain-related stocks also got caught up in the downdraft, with Coinbase Global and MicroStrategy dropping sharply as bitcoin prices tumbled. Moderna bucked the bearish trend with a 6.9% surge after positive data for its cancer vaccine developed with Merck.

Geopolitical tensions around Iran’s threat to potentially close the critical Strait of Hormuz shipping lane added another layer of anxiety.

While some might view the market jitters as a buying opportunity, the unease is unlikely to dissipate soon given the Fed uncertainty. Investors will be closely scrutinizing the minutes from the March FOMC meeting due out on Wednesday as well for additional clues on policymakers’ latest thinking.

With inflation proving stickier than expected, the Fed has increasingly pushed back against market pricing for rate cuts this year. Several Fed officials have emphasized that any cuts in 2024 are far from assured if inflation does not moderate substantially. That will keep all eyes laser-focused on each CPI print going forward.

Markets have been whipsawed by conflicting economic signals and rampant volatility as investors try to game the unpredictable path ahead. With high stakes riding on the inflation trajectory and its policy implications, intense swings are likely to persist as markets grapple with this high-wire act between overheating and overtightening.

JPMorgan CEO Jamie Dimon Warns of Higher Inflation Risk

Posted on by slightbourne@noblecapitalmarkets.com

In his latest annual letter to shareholders, JPMorgan Chase CEO Jamie Dimon struck a cautious tone about the economic outlook while renewing his criticisms of the stringent regulatory environment facing big banks.

The 67-year-old executive expressed concerns that persistently elevated inflation could prove “stickier” and force interest rates higher than currently expected. He pointed to the significant government spending programs, the Federal Reserve’s efforts to shrink its massive balance sheet, and the potential disruptions to commodity markets from the ongoing Russia-Ukraine war as risks that could keep upward pressure on prices.

Dimon stated JPMorgan is prepared for interest rates to range anywhere from 2% to 8% or even higher levels if needed to tame inflation. This highlights the bank’s caution around “unprecedented forces” impacting the economy that Dimon says warrant a prudent approach.

While the U.S. economy has proven resilient so far, Dimon seems to be bracing JPMorgan and shareholders for a bumpier road ahead marked by elevated price pressures.

The letter also contained Dimon’s latest broadside against the intensifying bank regulation stemming from the 2008 financial crisis and its aftermath. He argued relationships between banks and regulatory agencies like the Federal Reserve “have deteriorated significantly” in recent years and become “increasingly less constructive.”

A particular flashpoint is a proposed new rule that would require banks to hold greater capital buffers as protection against potential losses. Dimon contends the rule would be damaging to market-making activities, hurt the ability of Americans to access mortgages and other loans, and simply push more activity into the less-regulated shadows of the financial system.

He questioned the entire post-crisis rule-making process, arguing it has been unproductive, inefficient, and potentially unsafe by driving more leverage into opaque areas. Dimon even raised the possibility of litigation if regulators refuse to change course on the new capital rule.

The increasingly embattled tone highlights the widening schism between the traditional banking sector and their regulators in Washington over the impacts of stringent new safeguards following the global financial crisis 15 years ago.

On the succession front, JPMorgan acknowledged that one of the board’s top priorities is “enabling an orderly CEO transition” from Dimon in the “medium-term” future. The filing named executives like Jennifer Piepszak and Daniel Pinto as potential candidates to eventually take over from Dimon as CEO once he steps down. Pinto, currently serving as President and COO, is viewed as immediately capable of taking over as sole CEO if a more abrupt transition is needed.

Dimon has been at the helm of JPMorgan since 2005 after joining from the bank’s merger with Bank One. In his letter, the long-tenured CEO reflected on JPMorgan becoming an “endgame winner” among the nation’s largest banks over the past two decades through that deal and others.

The bank also provided an updated estimate that its recent acquisition of the failed First Republic Bank will add closer to $2 billion in annual earnings going forward, above its initial $500 million projection. The accretive deal highlights JPMorgan’s firepower to act as a sector consolidator during times of crisis and instability.

Dimon spent part of his letter defending JPMorgan’s decision to withdraw from the Climate Action 100+ coalition focused on emissions reductions. He stated the bank will make its own “independent decisions” on emissions policies instead of being influenced by the group. Dimon also took aim at proxy advisory firms ISS and Glass Lewis, arguing they too often recommend splitting chair/CEO roles at companies without clear evidence it improves performance or operations.

While expressing pride in JPMorgan’s status as an “endgame winner,” Dimon’s latest letter also served as a defiant rejection of headwinds facing large banks from regulators, climate groups, and other outside forces. The combative leader who helped build JPMorgan into a banking titan is clearly positioning for more battles ahead as the second quarter of 2024 unfolds.

Janet Yellen Signals Potential Tariffs on Chinese Green Energy Exports

Posted on by slightbourne@noblecapitalmarkets.com

U.S. Treasury Secretary Janet Yellen escalated trade tensions with China over its massive subsidies for green industries like electric vehicles, solar panels and batteries. During her recent four-day visit to Beijing, Yellen bluntly warned that the Biden administration “will not accept” American industries being decimated by a flood of cheap Chinese exports – a repeat of the “China shock” that hollowed out U.S. manufacturing in the early 2000s.

At the heart of the dispute are allegations that China has massively overinvested in renewable energy supply chains, building factory capacity far exceeding domestic demand. This excess output is then exported at artificially low prices due to Beijing’s subsidies, undercutting firms in the U.S., Europe and elsewhere.

“Over a decade ago, massive Chinese government support led to below-cost Chinese steel that flooded the global market and decimated industries across the world and in the United States,” Yellen said. “I’ve made it clear that President Biden and I will not accept that reality again.”

While not threatening immediate tariffs or trade actions, the stark warning shows Washington is seriously considering punitive measures if Beijing does not rein in subsidies and overcapacity. Yellen said U.S. concerns are shared by allies like Europe and Japan fearing a glut of unfairly cheap Chinese green tech imports.

For its part, China is pushing back hard. Officials argue the U.S. is unfairly portraying its renewable energy firms as subsidized, understating their innovation. They claim restricting Chinese electric vehicle imports would violate WTO rules and deprive global markets of key climate solutions.

Escalating tensions over green tech subsidies could disrupt trade flows and supply chains for renewable energy developers, electric automakers, battery manufacturers and more across multiple continents. Some key impacts for investors:

Rising Costs: Potential tariffs on Chinese solar panels, wind turbines, EV batteries and other components could increase costs for green energy projects in the U.S. and allied countries, slowing roll-out.

Shifting Competitive Landscape: Non-Chinese exporters of renewable hardware like solar from countries like South Korea, Vietnam or India may benefit from U.S. trade actions against China, increasing overall competition.

Consumer Prices: Green tech price inflation could be passed through to consumers for products like rooftop solar systems, home batteries and EVs if tariffs increase costs.

Strategic Decoupling: If tensions escalate towards a full “decoupling”, it could accelerate efforts by the U.S., Europe and others to secure their supply chains by bringing more critical green industries in-house through domestic investments and subsidies.

Stock Impacts: Depending on how tensions unfold, stocks of firms exposed to U.S.-China green tech trade flows could face volatility and disruptions in both directions. Tariffs would likely create clear winners and losers.

For now, Yellen says new forums for discussions have been created to potentially resolve overcapacity concerns. However, her blunt warnings suggest the U.S. will not hesitate to take tougher actions to protect America’s fledgling renewable energy and electric vehicle industries from alleged unfair Chinese trade practices.

Blowout U.S. Jobs Report Keeps Fed on Hawkish Path, For Now

Posted on by slightbourne@noblecapitalmarkets.com

The red-hot U.S. labor market showed no signs of cooling in March, with employers adding a whopping 303,000 new jobs last month while the unemployment rate fell to 3.8%. The much stronger-than-expected employment gains provide further evidence of the economy’s resilience even in the face of the Federal Reserve’s aggressive interest rate hikes over the past year.

The blockbuster jobs number reported by the Bureau of Labor Statistics on Friday handily exceeded economists’ consensus estimate of 214,000. It marked a sizeable acceleration from February’s solid 207,000 job additions and landed squarely above the 203,000 average over the past year.

Details within the report were equally impressive. The labor force participation rate ticked up to 62.7% as more Americans entered the workforce, while average hourly earnings rose a healthy 0.3% over the previous month. On an annualized basis, wage growth cooled slightly to 4.1% but remains elevated compared to pre-pandemic norms.

Investors closely watch employment costs for signs that stubbornly high inflation may be becoming entrenched. If wage pressures remain too hot, it could force the Fed to keep interest rates restrictive for longer as inflation proves difficult to tame.

“The March employment report definitively shows inflation remains a threat, and the Fed’s work is not done yet,” said EconomicGrizzly chief economist Jeremy Hill. “Cooler wage gains are a step in the right direction, but the central bank remains well behind the curve when it comes to getting inflation under control.”

From a markets perspective, the report prompted traders to dial back expectations for an imminent Fed rate cut. Prior to the data, traders were pricing in around a 60% chance of the first rate reduction coming as soon as June. However, those odds fell to 55% following the jobs numbers, signaling many now see cuts being pushed back to late 2024.

Fed chair Jerome Powell sounded relatively hawkish in comments earlier this week, referring to the labor market as “strong but rebalancing” and indicating more progress is needed on inflation before contemplating rate cuts. While the central bank welcomes a gradual softening of labor conditions, an outright collapse is viewed as unnecessarily painful for the economy.

If job gains stay heated but wage growth continues moderating, the Fed may feel emboldened to start cutting rates in the second half of 2024. A resilient labor market accompanied by cooler inflation pressures is the so-called “soft landing” scenario policymakers are aiming for as they attempt to tame inflation without tipping the economy into recession.

Sector details showed broad-based strength in March’s employment figures. Healthcare led the way by adding 72,000 positions, followed by 71,000 new government jobs. The construction industry saw an encouraging 39,000 hires, double its average monthly pace over the past year. Leisure & hospitality and retail also posted healthy employment increases.

The labor market’s persistent strength comes even as overall economic growth appears to be downshifting. GDP rose just 0.9% on an annualized basis in the final quarter of 2023 after expanding 2.6% in Q3, indicating deceleration amid the Fed’s rate hiking campaign.

While consumers have remained largely resilient thanks to a robust labor market, business investment has taken a hit from higher borrowing costs. This divergence could ultimately lead to payroll reductions in corporate America should profits come under further pressure.

For now, however, the U.S. labor force is flexing its muscles even as economic storm clouds gather. How long employment can defy the Fed’s rate hikes remains to be seen, but March’s outsized jobs report should keep policymakers on a hawkish path over the next few months.

Red Hot Labor Market as U.S. Employers Add 184,000 Jobs in March

Posted on by slightbourne@noblecapitalmarkets.com

The U.S. labor market showed no signs of cooling in March, with private employers boosting payrolls by 184,000 last month according to a report by payrolls processor ADP. The stronger-than-expected gain signaled the jobs machine kept humming despite the Federal Reserve’s aggressive interest rate hikes aimed at slowing the economy and conquering inflation.

The 184,000 increase was the largest monthly jobs number since July 2023 and topped economists’ estimates of 148,000. It followed an upwardly revised 155,000 gain in February. The vibrant report sets the stage for the government’s highly anticipated nonfarm payrolls release on Friday, with economists forecasting a still-solid 200,000 jobs were added economy-wide last month.

“March was surprising not just for the pay gains, but the sectors that recorded them,” said Nela Richardson, chief economist at ADP. “Inflation has been cooling, but our data shows pay is heating up in both goods and services.”

Indeed, wage pressures showed little evidence of easing last month. The ADP data showed annual pay increases for those keeping their jobs accelerated to 5.1%, matching the elevated pace from February. Workers switching jobs saw an even bigger 10% year-over-year jump in wages.

The stubborn strength of the labor market and still-elevated pace of wage increases complicates the Federal Reserve’s efforts to tame inflation, which has started to moderate but remains well above the central bank’s 2% target. Fed officials have signaled they likely have more interest rate hikes ahead as they try to dampen hiring and pay growth enough to fully wrestle inflation under control.

“The labor market remains surprisingly resilient despite the Fed’s tightening of financial conditions over the past year,” said Kathy Bostjancic, chief U.S. economist at Oxford Economics. “The strong March ADP gain suggests we’re not out of the woods yet on inflation pressures.”

Job growth in March was fairly broad-based across sectors and company sizes. The leisure and hospitality sector continued to be a standout, adding 63,000 new positions as Americans kept splurging on travel and entertainment. Construction payrolls increased by 33,000, while the trade, transportation and utilities sectors combined to add 29,000 workers.

Hiring was also widespread geographically, with the South leading the way by adding 91,000 new employees. The data showed bigger companies with over 50 workers accounted for most of the overall job gains.

One blemish was the professional and business services sector, which cut payrolls by 8,000 in a potential sign of some pockets of weakness emerging amid higher borrowing costs.

While the ADP report doesn’t always sync perfectly with the government’s more comprehensive employment survey, it adds to recent signs that a long-predicted U.S. economic downturn from the Fed’s inflation-fighting campaign has yet to fully materialize. The labor market has remained extraordinarily buoyant, with job openings still far exceeding the number of unemployed and layoffs staying low.

Economists expect Friday’s jobs report to show the unemployment rate held steady at 3.9% in March. If confirmed, it would mark over a year since joblessness was last below 4%, an extremely tight labor market that has forced many companies to raise wages at an unusually rapid clip in order to attract and retain workers.

With paychecks still climbing at a relatively elevated pace, the Fed worries inflationary pressures could become entrenched in the form of a self-perpetuating wage-price spiral. That fear raises the risk the central bank could opt for even higher interest rates, potentially increasing recession risks.

Job Market Stays Resilient as Openings Hold Steady

Posted on by slightbourne@noblecapitalmarkets.com

The latest employment data shows the resilience of the US labor market, even as the Federal Reserve remains locked in an inflation battle. The number of job openings across the country was essentially unchanged in February at 8.76 million, according to the Job Openings and Labor Turnover Survey (JOLTS) released by the Labor Department.

While just a slight 0.1% uptick from January’s revised 8.75 million openings, the figure highlights how robust hiring demand remains from employers over a year into the Fed’s interest rate hiking campaign. Job vacancies have been sticky at extremely elevated levels, leaving Fed officials frustrated in their efforts to ease wage growth and inflationary pressures.

“The labor market continues to defy expectations of a meaningful cooling,” said Samantha Gunther, economist at Credence Economics. “With openings still so high, wage growth is likely to remain too strong for the Fed’s liking in the months ahead.”

The JOLTS data precedes this week’s highly anticipated March jobs report, which is forecast to show nonfarm payrolls increased by 230,000 positions. That would mark a fourth straight month of job gains over 200,000, underscoring the employment market’s enduring tightness.

There were some modest signs of a gradual loosening in labor conditions buried within February’s openings figures. Job vacancies fell in sectors like information, healthcare and retail trade. More notably, the overall level of layoffs jumped to 1.8 million, the highest since last April, led by a spike in the leisure and hospitality industry.

“While the bar remains high for calling a turn in the labor cycle, we’re seeing some initial hints of cracks starting to form,” said Ryan Bingham, lead labor economist at ADP. “Higher borrowing costs are clearly starting to bite for certain service-sector businesses.”

The report also showed rates of workers quitting their jobs to pursue other opportunities held steady at 2.2% in February, the lowest since the summer of 2020. The diminished quits rate could indicate employees are feeling less confident about switching roles in a more uncertain economic climate.

Another indicator pointing to some easing was the ratio of available workers to job openings, which slipped to 1.36 from 1.43 in January. While still a very tight ratio favoring employers over job seekers, it marked progress toward better balance after peaking above 2-to-1 last year.

For the Fed, the upshot is likely more patience in leaving interest rates elevated. Chair Jerome Powell reiterated last week that stronger labor market “gives” would be needed to bring down unacceptably high inflation back toward the 2% goal.

With payroll growth expected to remain solid and job openings still extremely elevated, it will take more time before productivity-enhancing labor slack emerges. The latest JOLTS figures suggest that process is underway, however gradual it may prove to be.

Government Shutdown Avoided With $1.2 Trillion Plan

Posted on by slightbourne@noblecapitalmarkets.com

Congress succeeded in narrowly averting a partial government shutdown by passing a $1.2 trillion spending package, but the contentious process laid bare the dysfunctional politics plaguing Washington D.C. This brinkmanship threatens to erode economic confidence and financial market stability, posing risks that small cap investors must monitor closely.

The House of Representatives advanced the 1,012-page omnibus bill by the slimmest of margins on Friday, with the 286-134 vote squeaking by the two-thirds majority required under an expedited procedure. A faction of 112 Republican lawmakers opposed the bipartisan compromise negotiated by House Speaker Mike Johnson, characterizing it as a bloated spending measure drafted secretly. The rancorous divide even prompted Rep. Marjorie Taylor Greene to file a long-shot bid to remove Johnson from his leadership role.

The legislative turmoil then shifted to the Senate, where certain conservative members like Rand Paul and Tommy Tuberville signaled they could employ dilatory tactics to temporarily force a shutdown before the bill’s ultimate anticipated passage this weekend. While a short-term partial shutdown would have limited fallout for government operations with retroactive funding, the perpetual governance crises fomented by such maneuvers are deeply concerning for the economic outlook.

“This inability to govern pragmatically and reach reasonable compromise shakes confidence in American economic leadership at a pivotal juncture,” said Brendan Walsh, a partner at investment advisor Woodridge Partners. “The brinkmanship and uncertainty could undermine the environment for sustained earnings growth that small-cap companies rely upon.”

Lack of fiscal discipline, long-term economic foresight, and stable policymaking tends to breed volatility that markets abhor. With the looming prospect of a debt ceiling standoff on the horizon, the headwinds for equity investors are magnified. Buoyant stock valuations appear increasingly discordant with the actual deteriorating governance backdrop, suggesting potential downside risks are being underappreciated.

Indeed, major credit rating agencies have already taken action reflecting these dynamics. Fitch downgraded its U.S. sovereign debt rating in August 2022, citing escalating budgetary dysfunction as a primary factor. Similarly, Moody’s revised its U.S. outlook to negative last November amid the fiscal policy disarray, signaling another downgrade could materialize.

“The perpetual political dramas surrounding basic government funding operations speak to deeper systemic issues that have now directly threatened America’s pristine credit rating,” said Liz Young, head of investment strategy at Renaissance Capital. “This turmoil should be highly concerning for small-cap investors sensitized to economic shifts.”

While equity markets exhibited nonchalance toward this latest shutdown scare, previous prolonged political standoffs over the debt ceiling and government funding have periodically roiled stocks. The S&P 500 fell over 10% in summer 2011 as partisan factions brawled over raising the debt limit before an eleventh-hour resolution, exemplifying how swiftly sentiment can sour during such imbroglios.

With the upcoming debt ceiling fight potentially catalyzing another such conflict before year-end, watchful small-cap investors must be vigilant for escalating dysfunction that could provoke turbulent volatility.

“At a certain threshold, this unproductive political rancor manifests tangible economic and market consequences that can no longer be easily dismissed,” Walsh cautioned. “Preparing defensive postures and hedging strategies may be prudent to navigate potential volatility spawned by these self-inflicted crises.”

The latest spending package does provide several pro-growth provisions appealing to corporations, including increased funding for medical research, childcare, and other Democratic policy priorities. But ultimately, the bruising legislative process highlighted that divided government paralysis remains intractable in the nation’s capital.

As these drawn-out fiscal policy standoffs grow increasingly commonplace, the risks of ebbing economic confidence and corporate earnings growth may become more acute for small-cap equity investors. Monitoring this governance turmoil will be crucial for calibrating prudent portfolio positioning in the months ahead.

Fed Keeps Rates Steady, But Signals More Cuts Coming in 2024

Posted on by slightbourne@noblecapitalmarkets.com

The Federal Reserve held its benchmark interest rate unchanged on Wednesday following its latest two-day policy meeting. However, the central bank signaled that multiple rate cuts are likely before the end of 2024 as it continues efforts to bring down stubbornly high inflation.

In its post-meeting statement, the Fed kept the target range for its federal funds rate at 5.25%-5.5%, where it has been since last July. This matched widespread expectations among investors and economists.

The more notable part of today’s announcements came from the Fed’s updated Summary of Economic Projections. The anonymous “dot plot” of individual policymaker expectations showed a median projection for three quarter-point rate cuts by year-end 2024.

This would mark a pivotal shift for the Fed, which has been steadily raising rates over the past year at the fastest pace since the 1980s to combat surging inflation. The last time the central bank cut rates was in the early days of the COVID-19 pandemic in March 2020.

Fed Chair Jerome Powell and other officials have signaled in recent months that softer policies could be appropriate once inflation shows further clear signs of moderating. Consumer prices remain elevated at 6% year-over-year as of February.

“While inflation has moderated somewhat since the middle of last year, it remains too high and further progress is needed,” said Powell in his post-meeting press conference. “We will remain data-dependent as we assess the appropriate stance of policy.”

The Fed’s updated economic projections now forecast GDP growth of 2.1% in 2024, up sharply from the 1.4% estimate in December. Core inflation is seen decelerating to 2.6% by year-end before returning to the Fed’s 2% target by 2026. The unemployment rate projection was nudged down to 4%.

With economic conditions still relatively strong, Powell stressed the central bank’s ability to move gradually and in a “risk management” mindset on raising or lowering interest rates. Markets expect the first rate cut to come as soon as June.

“The process of getting inflation down to 2% has a long way to go and is likely to be bumpy,” said Powell. “We have more work to do.”

The potential for rate cuts this year hinges on how quickly the lagging effects of the Fed’s aggressive tightening campaign over the past year feed through into lower price pressures. Policymakers will be closely watching metrics like consumer spending, wage growth, supply chains and inflation expectations for any signs that demand is cooling sustainably.

So far, the labor market has remained resilient, with job gains still robust and the unemployment rate hovering near 50-year lows around 3.5%. This tightness has allowed for solid wage gains, which risks perpetuating an inflationary price-wage spiral if not brought to heel.

While the road ahead remains highly uncertain, Powell stated that he feels the Fed has made enough policy adjustments already to at least pause the rate hiking cycle for now and switch into a data-driven risk management mode. This allows officials to be “patient” and avoid over-tightening while monitoring incoming information.

The Fed Chair also noted that discussions on reducing the central bank’s $8.4 trillion balance sheet began at this meeting, but no decisions have been made yet on adjusting the current runoff caps or pace.

In all, today’s Fed meeting reiterated the central bank’s intention to keep rates elevated for now while laying the groundwork for an eventual pivot to easier policy sometime later this year as disinflationary forces take deeper hold. Striking that balance between under and overtightening will be key for engineering a long-awaited soft landing for the economy.

Inflation Refuses to Cool as Consumer Prices Surge More Than Expected

Posted on by slightbourne@noblecapitalmarkets.com

Hopes for an imminent pause in the Federal Reserve’s interest rate hiking campaign were dashed on Tuesday as new data showed consumer prices rose more than forecast last month. The stubbornly high inflation figures make it likely the central bank will extend its most aggressive policy tightening cycle since the 1980s.

The Consumer Price Index climbed 0.4% from January and 3.2% annually in February, according to the Bureau of Labor Statistics. That exceeded all estimates in a Bloomberg survey of economists who had projected a 0.3% monthly gain and a 3.1% year-over-year increase.

Stripping out volatile food and energy costs, the core CPI accelerated to 0.4% for the month and 3.8% from a year ago, also topping projections. The surprisingly hot readings marked an unwelcome re-acceleration after months of gradually cooling price pressures had buoyed expectations that the Fed may be able to begin cutting rates before year-end.

The data landed like a bucket of cold water on hopes that had been building across financial markets in recent weeks. Investors swiftly repriced their bets, now seeing around a 90% chance that the Fed’s policy committee will raise interest rates by another quarter percentage point at their March 22nd meeting. As recently as Friday, traders had been leaning toward no change in rates next week.

“After taking a step back the last couple of months, it appears inflation regained its footing in February,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. “A re-acceleration could mean a longer period of policy restrictiveness is required to bring it down on a sustained basis.”

The biggest driver of February’s price spike was housing, which accounts for over 40% of the CPI calculation. Shelter costs surged 0.4% for the month and are now up a sizable 5.7% versus a year ago. While down from their 2022 peaks, those increases remain far too hot for the Fed’s comfort.

Rents rose 0.5% in February while the owners’ equivalent measure, which tracks costs for homeowners, jumped 0.4%. Both measures are watched closely by policymakers, as housing represents the heaviest weight in the index and tends to be one of the stickier components of inflation.

David Tulk, senior portfolio manager at Allianz Global Investors, said the latest shelter prints mean “the Fed’s path to restoring price stability is going to be a tough one.” He added that debate among central bankers over whether to raise rates by a quarter percentage point or go for a more aggressive half-point move now seems “settled in favor of 25 basis points.”

Energy and gasoline prices also contributed heavily to February’s elevated inflation figures. The energy index rose 2.3% last month, fueled by a 3.8% surge in gas costs. Those pressures could intensify further after recent OPEC production cuts.

Food prices were relatively contained last month, holding steady from January levels. But overall grocery costs are up 10.2% versus a year ago as the battered supply chains and labor shortages stemming from the pandemic continue to reverberate.

While this latest inflation report dealt a significant blow to hopes for an imminent pivot toward easier Fed policy, economists are still forecasting price pressures to ease over the year thanks to cooling pipeline pressures from housing and wages.

However, reaching the Fed’s 2% inflation target is likely to require a measure of demand destruction and labor market softening that could potentially tip the economy into recession. It remains to be seen if central bank policymakers will be able to orchestrate the elusive “soft landing” they have long aimed for.

Job Growth Exceeds Expectations, but Raises Questions on Economy’s Path

Posted on by slightbourne@noblecapitalmarkets.com

The U.S. labor market turned in another solid performance in February, adding 275,000 new jobs and keeping the unemployment rate near historic lows. However, mixed signals within the employment report raised more questions than answers about the strength of the economy and the Federal Reserve’s next policy moves.

The 275,000 increase in non-farm payrolls topped economists’ expectations of 198,000 and showed hiring picked up after January’s downwardly revised 229,000 gain. The unemployment rate ticked higher to 3.9%, as more Americans entered the labor force but couldn’t immediately find jobs.

While the headline job growth was robust, details within the report revealed some potential red flags. Revisions slashed 167,000 jobs off the initially reported totals for December and January, indicating the labor market wasn’t quite as sturdy late last year as originally thought.

Additionally, wage growth is moderating after a strong run in 2022. Average hourly earnings rose just 0.1% for the month, undershooting forecasts, and are up 4.3% over the past year versus 4.5% year-over-year in January. Slower wage growth could ease inflation pressures but also signals softer labor demand.

“This jobs report has something for everyone in terms of economic narratives,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “You can view it as evidence the economy is weakening and a recession could be coming, or that it’s a Goldilocks scenario with solid growth and contained inflation.”

The details were undeniably mixed. Full-time jobs decreased, while part-time positions increased. And while the unemployment rate rose, measures of labor force participation also ticked higher, indicating workers are returning from the sidelines.

Industry hiring patterns reinforced the muddy economic picture. Healthcare companies led with 67,000 new jobs last month, while the government added 52,000 positions. Those stable healthcare and public sector gains were offset by disappointments in interest-rate sensitive areas like construction (23,000) and manufacturing, which saw a decline.

The spending side of the economy showed signs of life, with restaurants/bars adding 42,000 jobs and retailers hiring 19,000. But some of those consumer-facing gains could simply reflect volatility after January’s weather disruptions.

From an investing standpoint, the conflicting data raises uncertainty around the Fed’s rate path and the probability of a recession arriving in the next 12-18 months. Prior to the release, markets had priced in the Fed’s first rate cut in March based on signs of economic slowing.

However, the February jobs figures, combined with recent hawkish Fed rhetoric, shifted rate cut expectations to June or even July. Traders now see around 4 quarter-point cuts this year, down from upwards of 6-7 cuts priced in previously.

Dan North, senior economist at Allianz Trade Americas, said the nuanced report likely “doesn’t change the narrative” for the Fed in the near-term. “We’re still growing jobs at a good pace, and wages, while elevated, have come down a bit,” he said. “The Fed has more wood to chop, but the path towards easier policy is still visible on the horizon.”

For equity investors, the employment crosscurrents create a murky outlook that will require close monitoring of upcoming data points. On one hand, continued job creation supports consumer spending and Corporate America’s ability to preserve profit margins through the year.

The risk is that the Fed overtightens policy, doesn’t cut rates quickly enough, and the still-resilient labor market tips into contraction. That could increase recession odds and put downward pressure on revenue and earnings forecasts.

When job reports deliver contradictory signals, the prudent investment strategy is to prepare for multiple scenarios. Building defensive portfolio positions and rebalancing asset allocations can provide insulation if economic conditions deteriorate faster than expected. At the same time, holding core positions in quality companies can allow for participation if solid labor markets translate into better-than-feared growth.

Mixed economic data opens the door to increased market volatility. And in that environment, disciplined investing, active management, and opportunistic portfolio adjustments often become critical drivers of long-term returns.

Mortgage Rates and Stocks Find Relief as Powell Reinforces Rate Cut Prospects

Posted on by slightbourne@noblecapitalmarkets.com

The housing and stock markets received a welcome boost this week as Federal Reserve Chair Jerome Powell reinforced expectations for interest rate cuts later this year. In his semi-annual monetary policy testimony to Congress, Powell acknowledged that recent data shows inflation is moderating, paving the way for potential rate reductions in 2024.

For homebuyers and prospective sellers who have grappled with soaring mortgage rates over the past year, Powell’s remarks offer a glimmer of hope. Mortgage rates, which are closely tied to the Fed’s benchmark rate, have retreated from their recent highs, dipping below 7% for the first time since mid-February.

According to Mortgage News Daily, the average rate for a 30-year fixed-rate mortgage settled at 6.92% on Thursday, while Freddie Mac reported a weekly average of 6.88% for the same loan term. This marks the first contraction in over a month and a significant improvement from the peak of around 7.3% reached in late 2023.

The moderation in mortgage rates has already begun to revive homebuyer demand, as evidenced by a nearly 10% week-over-week increase in mortgage applications. The Mortgage Bankers Association (MBA) noted that the indicator measuring home purchase applications rose 11%, underscoring the sensitivity of first-time and entry-level homebuyers to even modest rate changes.

“Mortgage applications were up considerably relative to the prior week, which included the President’s Day holiday. Of note, purchase volume — particularly for FHA loans — was up strongly, again showing how sensitive the first-time homebuyer segment is to relatively small changes in the direction of rates,” said Mike Fratantoni, MBA’s chief economist.

This renewed interest from buyers coincides with a much-needed increase in housing inventory. According to Realtor.com, active home listings grew 14.8% year-over-year in February, the fourth consecutive month of annual gains. Crucially, the share of affordable homes priced between $200,000 and $350,000 increased by nearly 21% compared to last year, potentially opening doors for many previously priced-out buyers.

The stock market has also responded positively to Powell’s testimony, interpreting his comments as a reassurance that the central bank remains committed to taming inflation without derailing the economy. Despite a hotter-than-expected inflation report in January, Powell reiterated that rate cuts are likely at some point in 2024, provided that price pressures continue to subside.

Investors cheered this stance, propelling the S&P 500 to new record highs on Thursday. The benchmark index gained nearly 1%, while the tech-heavy Nasdaq Composite surged 1.4%, underscoring the market’s preference for a more dovish monetary policy stance.

However, Powell cautioned that the timing and magnitude of rate cuts remain uncertain, as the Fed seeks to strike a delicate balance between containing inflation and supporting economic growth. “Pinpointing the optimal timing for such a shift has been a challenge,” said Jiayi Xu, Realtor.com’s economist. “Specifically, the risk of a dangerous inflation rebound is looming if rate cuts are made ‘too soon or too much.'”

This ambiguity has contributed to ongoing volatility in both the housing and stock markets, as market participants attempt to gauge the Fed’s next moves. While the prospect of rate cuts has provided relief, concerns remain that the central bank may need to maintain a more hawkish stance if inflationary pressures prove more stubborn than anticipated.

Nevertheless, Powell’s remarks have injected a sense of optimism into the markets, at least temporarily. For homebuyers, the potential for lower mortgage rates could translate to increased affordability and a more favorable environment for purchasing a home. Meanwhile, investors have embraced the possibility of a less aggressive monetary policy stance, driving stocks higher in anticipation of a potential economic soft landing.

As the data continues to unfold, both the housing and stock markets will closely monitor the Fed’s actions and rhetoric. While challenges persist, Powell’s testimony has offered a glimpse of light at the end of the tunnel, reigniting hopes for a more balanced and sustainable economic landscape in the months ahead.