Tag: 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.

Job Market Remains Resilient Despite Cooling Pace of Hiring

Posted on by slightbourne@noblecapitalmarkets.com

The U.S. job market continues to display remarkable resiliency, even as the blistering pace of hiring has started to moderate from the torrid levels seen over the past couple of years. The latest employment data suggests that while businesses may be tapping the brakes on their aggressive hiring sprees, the overall labor landscape remains favorable for job seekers.

According to the ADP National Employment Report released on March 6th, private sector employment increased by 140,000 jobs in February. While this figure fell short of economists’ projections of 150,000 new jobs, it represents a solid uptick from the upwardly revised 111,000 jobs added in January. The leisure and hospitality sector led the way, tacking on 41,000 positions, followed by construction (28,000) and trade, transportation and utilities (24,000).

The ADP report, which is derived from payroll data, serves as a precursor to the highly anticipated monthly Employment Situation report issued by the Bureau of Labor Statistics (BLS). Economists anticipate that the BLS data, set for release on March 10th, will reveal an even more robust job gain of around 198,000 for February.

This sustained momentum in hiring underscores the enduring strength of the U.S. labor market, even as the Federal Reserve’s aggressive interest rate hikes aimed at taming inflation have stoked concerns about a potential economic downturn. The resilience of the job market has been a crucial bulwark against recessionary forces, buttressing consumer spending and overall economic growth.

However, there are signs that the once-blazing hot job market is starting to cool, albeit in a relatively controlled and gradual manner. The number of job openings, a key indicator of labor demand, has steadily declined from its peak of 12 million in March 2022 but remains elevated at nearly 8.9 million as of January, according to the latest Job Openings and Labor Turnover Survey (JOLTS) report.

This gradual tapering of job openings suggests that employers are becoming more judicious in their hiring practices, potentially a reflection of the broader economic uncertainty and the lagging effects of the Fed’s rate hikes. Nevertheless, the fact that openings remain well above pre-pandemic levels highlights the continued tightness of the labor market.

Moreover, the JOLTS data revealed a modest decline in the number of voluntary quits, often viewed as a barometer of workers’ confidence in their ability to secure better employment opportunities. While still historically high, the dip in quits could signal that some of the exceptional job-hopping dynamics that characterized the pandemic era are beginning to normalize.

From an investor’s perspective, the persistent strength of the job market, coupled with gradually decelerating inflation, presents a Goldilocks scenario – an economy that is neither running too hot nor too cold. This environment could potentially extend the current economic expansion, providing a favorable backdrop for corporate profitability and stock market performance.

However, investors should remain vigilant for any signs of a more pronounced slowdown in hiring or a significant uptick in layoffs, which could presage a broader economic downturn. Moreover, the Fed’s policy path remains a crucial variable, as overly aggressive rate hikes aimed at vanquishing inflation could potentially undermine the job market’s resilience.

Overall, the latest employment data depicts a job market that, while losing some of its blistering momentum, remains remarkably sturdy and continues to defy expectations of an imminent downturn. For investors, this Goldilocks scenario could prolong the economic cycle, but close monitoring of labor market dynamics and the Fed’s policy trajectory will be essential in navigating the road ahead.

Treasury Yields Jump Ahead of Crucial Economic Data and Powell Testimony

Posted on by slightbourne@noblecapitalmarkets.com

U.S. Treasury yields kicked off the new week on an upswing as investors braced for a slew of high-impact economic releases and testimony from Federal Reserve Chair Jerome Powell that could shape the central bank’s monetary policy path. With inflation still running high and the labor market remaining resilient, all eyes are on the incoming data to gauge whether the Fed’s aggressive rate hikes have begun cooling economic activity enough to potentially allow a pause or pivot.

The yield on the 10-year Treasury note, a benchmark for mortgage rates and other consumer lending products, rose by around 4 basis points to 4.229% on Monday. The 2-year yield, which is highly sensitive to Fed policy expectations, spiked over 5 basis points higher to 4.585%. Yields rise when bond prices fall as investors demand higher returns to compensate for inflation risks.

The move in yields came ahead of a data-heavy week packed with labor market indicators that could influence whether the Fed continues hiking rates or signals a prolonged pause is forthcoming. Investors have been hanging on every new economic report in hopes of clarity on when the central bank’s tightening cycle may finally conclude.

“The labor market remains the key variable for Fed policy, so any upside surprises on that front will likely be interpreted as raising the prospect of further rate hikes,” said Kathy Bostjancic, chief U.S. economist at Oxford Economics. “Conversely, signs of cooling could open the door to rate hikes ending soon and discussion over rate cuts later this year.”

This week’s labor market highlights include the Job Openings and Labor Turnover Survey (JOLTS) for January on Wednesday, ADP’s monthly private payrolls report on Thursday, and the ever-important nonfarm payrolls data for February on Friday. Economists project the economy added 205,000 jobs last month, according to Refinitiv estimates, down from January’s blockbuster 517,000 gain but still a solid pace of hiring.

Beyond employment, investors will also scrutinize fresh insights from Fed Chair Powell when he delivers his semi-annual monetary policy testimony to Congress on Wednesday and Thursday. Any signals Powell sends about upcoming rate decisions and the central bank’s perspective on achieving price stability could spark volatility across markets.

“Given how uncertain the path is regarding where rates will peak and how long they’ll remain at that level, markets will be hyper-focused on Powell’s latest take,” DataTrek co-founder Nick Colas commented. “Right now, futures are pricing in one more 25 basis point hike at the March meeting followed by a pause, but that could certainly change depending on Powell’s tone this week.”

Interest rates in the fed funds futures market are currently implying a 70% probability the Fed raises its benchmark rate by a quarter percentage point later this month to a target range of 4.75%-5.00%. However, projections for where rates peak remain widely dispersed, ranging from 5.00%-5.25% on the dovish end up to 5.50%-5.75% at the hawkish extreme if inflationary forces persist.

Central to the Fed’s calculus is progress on its dual mandate of achieving maximum employment and price stability. While the labor market has remained extraordinarily tight, the latest inflation data has sent mixed signals, muddling the policy outlook.

In January, the Fed’s preferred inflation gauge – the personal consumption expenditures (PCE) price index – showed an annual increase of 5.4% for the headline figure and 4.7% for the core measure that strips out volatile food and energy costs. While still well above the 2% target, the year-over-year readings decelerated from December, potentially marking a peak for this cycle.

However, other data including the consumer price index and producer prices have painted a stickier inflation picture. Rapidly rising services costs, stubbornly high rents, and short-term inflation expectations ticking higher have all fueled anxiety that the disinflationary process isn’t playing out as smoothly as hoped.

Complicating matters is the impact of higher rates for longer on economic growth and the broader financial system. Last week’s reports of Silicon Valley Bank and Silvergate Capital making severe business cuts crystallized the double-edged sword of tighter monetary policy. While intended to cool demand and thwart inflation, rising borrowing costs can tip the scale towards financial stress.

Given these cross-currents, all eyes will be fixated on this week’s dataflow and Powell’s latest rhetoric. Softer labor market figures and more affirmation inflation is peaking could pave the way for an extended pause in rate hikes later this year. But a continued barrage of hot data and rising inflation expectations could embolden the Fed to deliver additional super-sized rate increases to fortify its inflation-fighting credibility, even at the risk of raising recession risks. Market participants should brace for a pivotal week ahead.

Powell Reiterates Careful Approach to Rate Cuts

Posted on by cpatches

In a recent interview on “60 Minutes,” Federal Reserve Chair Jerome Powell underscored the central bank’s commitment to a cautious approach regarding interest rate cuts in the upcoming year. Powell emphasized that any rate adjustments would likely unfold at a slower pace than market expectations, signaling a deliberate strategy in response to prevailing economic conditions.

Powell expressed confidence in the current state of the economy, highlighting the need for substantial evidence of sustained inflation movement toward the 2% target before considering rate cuts. He also assured the general public that the upcoming presidential election would not influence the Federal Reserve’s decision-making process.

Powell indicated that the Federal Open Market Committee (FOMC) is unlikely to make its first move, in the form of a rate cut, in March. This statement contrasted with market expectations, which have been making aggressive bets on multiple rate cuts throughout the year.

While market pricing suggests the possibility of five quarter-percentage points reductions, Powell aligned with the FOMC’s December “dot plot,” which indicated three potential moves. This clarification sought to manage expectations and temper speculation surrounding the timing and extent of rate adjustments.

Powell acknowledged that inflation remains above the Fed’s target but has stabilized. The robust job market, with 353,000 non-farm jobs added in January, adds to the Federal Reserve’s positive outlook. Powell identified geopolitical events as the primary risk to the economy.

Following the interview, U.S. stocks experienced a decline, reacting to Powell’s cautious stance on rate cuts. The market had previously seen a week of volatility, concluding with weekly gains driven by a strong January jobs report and positive corporate earnings updates.

Powell addressed public perception of inflation, noting that while the official data may show stability, people are experiencing higher prices for basic necessities. He highlighted the dissatisfaction among the public with the current economic situation despite its overall strength. Powell clarified the distinction between inflation and the absolute price level of goods and services. He explained that people’s dissatisfaction often stems from the rising prices of essential items like bread, milk, eggs, and meats, even though the overall economy is performing well.

Powell acknowledged the challenge in communicating economic concepts to the public, noting the discrepancy between public sentiment and economic indicators. He addressed the professional investing public’s understanding of the rate of change in inflation compared to the general public’s focus on the absolute price level.

Powell’s reaffirmation of a cautious approach to rate cuts serves as a crucial communication strategy to manage market expectations and maintain confidence in the economic outlook. The interview highlighted the Federal Reserve’s commitment to data-driven decisions and its consideration of various economic factors in determining the timing and extent of any potential rate adjustments.

January Jobs Report Beats Estimates

Posted on by cpatches

The latest jobs report for January 2024 has exceeded expectations, showcasing the robustness of the U.S. economy despite recent high-profile layoffs. The key indicators demonstrate strong job creation, surpassing both estimates and revised figures from the previous month.

Key Figures

In January 2024, the U.S. economy generated an impressive 353,000 nonfarm payroll jobs, well above the Dow Jones estimates of 185,000. This figure also outpaced the revised December 2023 data, which reported 333,000 jobs created. The unemployment rate for January 2024 remained steady at 3.7%, surpassing the estimated 3.8%, indicating a stable job market. Average hourly earnings exhibited substantial growth, surging by 0.6%, doubling the estimates. Year-over-year, wages have increased by 4.5%, exceeding the forecasted 4.1%. Significant contributors to January’s job growth include Professional and Business Services (74,000 jobs), Health Care (70,000), Retail Trade (45,000), Government (36,000), Social Assistance (30,000), and Manufacturing (23,000). Despite the overall positive report, there were slight declines. The labor force participation rate dipped to 62.5%, down 0.1% from December 2023, and average weekly hours worked decreased slightly to 34.1.

Resilience Amidst Recent High-Profile Layoffs

This comes in the midst of many high-profile layoffs. UPS announced 12,000 job cuts amidst lower package volume. iRobot announced 350 layoffs following a failed acquisition by Amazon. Levi Strauss announced they will layoff between 10 and 15% of their workers. Microsoft, following their major Activision Blizzard acquisition, announced 1900 layoffs in their gaming division. Citi Group announced that they will lay off 20,000 employees over the next two years. But, as of this most recent report, it appears these layoffs have not significantly impacted the overall employment landscape.

The Federal Reserve’s Perspective

The strong job numbers prompt speculation about potential Federal Reserve actions. Fed Chair Jerome Powell emphasized the current strength of the labor market, stating that the Fed is looking for a balance and robust growth. Powell noted that the Fed doesn’t require a significant softening in the labor market to consider rate cuts but is keen on seeing continued strong growth and decreasing inflation.

The Federal Reserve, in its recent meeting, maintained benchmark short-term borrowing costs and hinted at potential rate cuts in the future. However, such cuts are contingent on further signs of cooling inflation. The central bank remains focused on addressing the impact of high inflation on consumers rather than adhering to a specific growth mandate.

January’s jobs report underscores the resilience of the U.S. economy, outperforming expectations in key indicators. While high-profile layoffs have made headlines, the overall labor market remains robust. The Federal Reserve’s cautious optimism and potential future rate adjustments indicate a nuanced approach to maintaining economic balance.

JOLTS Report Shows Ongoing Labor Market Tightness

Posted on by slightbourne@noblecapitalmarkets.com

The latest Job Openings and Labor Turnover Survey (JOLTS) report released Tuesday by the Bureau of Labor Statistics showed job openings rose to 9.02 million in December, up from a revised 8.92 million in November. This was higher than economist forecasts of 8.75 million openings.

The December JOLTS report indicates ongoing tightness in the US labor market, as job openings remain stubbornly high even as the Federal Reserve has aggressively raised interest rates over the past year to cool demand and curb inflationary pressures.

On the surface, the rise in openings appears a negative sign for monetary policy aimed at loosening the jobs market. However, the increase was small, and openings remain well below the March 2023 peak of 11.9 million. The quits rate, which measures voluntary departures and is an indicator of workers’ confidence in ability to find new jobs, also edged down to 2.1% in December, though it remains elevated historically.

This suggests the Fed’s policy actions may be having a gradual effect, but the labor market remains tight overall. Layoffs also stayed low in December, with just 1.6 million separations due to layoffs or discharges during the month. The labor force participation rate ticked up to 62.3% in December, so labor supply is expanding somewhat, though participation remains below pre-pandemic levels.

For the Fed, the report provides ammunition on both sides of the debate as to whether a pause in rate hikes is warranted or further increases are needed to achieve a soft landing. Markets see a mixed bag, with the US dollar index largely unchanged on the day and Treasury yields seeing only slight moves following the release.

Impact on Economic Outlook

The bigger picture is that while job openings are declining, they remain unusually high, indicative of continued broad demand for workers across sectors like healthcare, manufacturing, and hospitality. Businesses appear eager to hire even amidst an economic slowdown and uncertainty about the outlook.

This need for workers will support consumer spending, the primary engine of US GDP growth, as long as hiring remains robust and layoffs low. But it also means upward pressure on wages as employers compete for talent, which could fuel inflation. Herein lies the conundrum for monetary policy.

The strength of the labor market is a double-edged sword – positive for growth in the near term, but concerning for the Fed’s inflation fight if it necessitates further large wage increases.

Chair Powell has been adamant the Fed’s priority is reducing inflation, even at the risk of economic pain. With the jobs market still hot in late 2023, further rate hikes seem likely at upcoming policy meetings absent a substantial cooling in inflation or rise in unemployment.

Payroll growth could slow in 2024 from levels above 400,000 per month in 2023, but demand remains too high relative to labor supply. The Fed wants meaningful softening in job openings and wage growth, which has yet to fully materialize. Unemployment would likely need to rise to the high 3% range or beyond to reduce wage pressures.

The JOLTS report provides important context on the state of the labor market amid crosscurrents in other economic data. Manufacturing has slowed and housing has declined, but consumers keep spending and job switching remains high. The Fed is unlikely to declare victory or shift to rate cuts with this conflicting mix of weak and resilient activity.

The path for monetary policy and markets will depend on which direction the trends in openings, wages, inflation and jobs growth tilt in coming months. For now, the JOLTS report gives the sense of an economy and labor market that are cooling gradually under the weight of higher rates rather than slowing precipitously.

Cooling Inflation Fuels Hope of Fed Rate Cuts Despite Economic Strength

Posted on by slightbourne@noblecapitalmarkets.com

The latest inflation reading is providing critical evidence that the Federal Reserve’s interest rate hikes through 2023 have begun to achieve their intended effect of cooling down excessively high inflation. However, the timing of future Fed rate cuts remains up in the air despite growing optimism among investors.

On Friday, the Commerce Department reported that the Fed’s preferred inflation gauge, the core personal consumption expenditures (PCE) index, rose 2.9% in December from a year earlier. This marked the first time since March 2021 that core PCE dipped below 3%, a major milestone in the fight against inflation.

Even more encouraging is that on a 3-month annualized basis, core PCE hit 1.5%, dropping below the Fed’s 2% target for the first time since 2020. The deceleration of price increases across categories like housing, goods, and services indicates that tighter monetary policy has started rebalancing demand and supply.

As inflation falls from 40-year highs, pressure on the Fed to maintain its restrictive stance also eases. Markets now see the central bank initiating rate cuts at some point in 2024 to stave off excess weakness in the economy.

However, policymakers have been pushing back on expectations of cuts as early as March, emphasizing the need for more consistent data before declaring victory over inflation. Several have suggested rate reductions may not occur until the second half of 2024.

This caution stems from the still-hot economy, with Q4 2023 GDP growth hitting a better-than-expected 3.3% annualized. If consumer spending, business activity, and the job market stay resilient, the Fed may keep rates elevated through the spring or summer.

Still, traders are currently pricing in around a 50/50 chance of a small 0.25% rate cut by the May Fed meeting. Just a month ago, markets were far more confident in a March cut.

While the inflation data provides breathing room for the Fed to relax its hawkish stance, the timing of actual rate cuts depends on the path of the economy. An imminent recession could force quicker action to shore up growth.

Meanwhile, stock markets cheered the evidence of peaking inflation, sending the S&P 500 up 1.9% on Friday. Lower inflation paves the way for the Fed to stop raising rates, eliminating a major headwind for markets and risk assets like equities.

However, some analysts caution that celebratory stock rallies may be premature. Inflation remains well above the Fed’s comfort zone despite the recent progress. Corporate earnings growth is also expected to slow in 2024, especially if the economy cools faster than expected.

Markets are betting that Fed rate cuts can spur a “soft landing” where growth moderates but avoids recession. Yet predicting the economy’s path is highly challenging, especially when it has proven more resilient than anticipated so far.

If upcoming data on jobs, consumer spending, manufacturing, and GDP point to persistent economic strength, markets may have to readjust their optimistic outlook for both growth and Fed policy. A pause in further Fed tightening could be the best-case scenario for 2024.

While lower inflation indicates the Fed’s policies are working, determining the appropriate pace of reversing course will require delicate judgment. Moving too fast risks re-igniting inflation later on.

The détente between inflation and the Fed sets the stage for a pivotal 2024. With core PCE finally moving decisively in the right direction, Fed Chair Jerome Powell has some latitude to nurse the economy toward a soft landing. But stability hinges on inflation continuing to cool amid resilient growth and spending.

For investors, caution and flexibility will be key in navigating potentially increased market volatility around Fed policy. While lower inflation is unambiguously good news, its impact on growth, corporate profits, and asset prices may remain murky until more economic tea leaves emerge through the year.

Jobless Claims Hit Lowest Level Since September 2022 as Labor Market Defies Fed

Posted on by slightbourne@noblecapitalmarkets.com

The U.S. job market continues to show resilience despite the Federal Reserve’s efforts to cool economic growth, according to new data released Thursday. Initial jobless claims for the week ending January 13 fell to 187,000, the lowest level since September of last year.

The decline in claims offers the latest evidence that employers remain reluctant to lay off workers even as the Fed raises interest rates to curb demand. The total marked a 16,000 drop from the previous week and came in well below economist forecasts of 208,000.

“Employers may be adding fewer workers monthly, but they are holding onto the ones they have and paying higher wages given the competitive labor market,” said Robert Frick, corporate economist at Navy Federal Credit Union.

The surprising strength comes even as the Fed has lifted its benchmark interest rate seven times in 2023 from near zero to a range of 4.25% to 4.50%. The goal is to dampen demand across the economy, particularly the red-hot job market, in order to bring down uncomfortably high inflation.

In addition to the drop in claims, continuing jobless claims for the week ending January 6 also declined by 26,000 to 1.806 million. That figure runs a week behind the headline number and likewise came in below economist estimates.

The resilience in the labor market comes even as broader economic activity shows signs of cooling. In its latest Beige Book report, the Fed noted that the economy has seen “little or no change” since late November.

Housing markets are a key area feeling the pinch from higher borrowing costs. The Fed summary showed residential real estate activity constrained by rising mortgage rates. Still, there were some green shoots in Thursday’s housing starts data.

Building permits, a leading indicator of future home construction, rose 1.9% in December to 1.495 million. That exceeded economist forecasts of 1.48 million permits. Actual housing starts declined 4.3% to 1.46 million, but still topped estimates calling for 1.43 million.

“The prospects of future easing from the Fed were raising hopes that the pace could accelerate,” the original article noted about housing.

Outside of housing, manufacturing activity in the Philadelphia region contracted again in January, though at a slightly slower pace. The Philly Fed’s index rose to -10.6 this month from -12.8 in December. Readings below zero indicate shrinking activity.

The survey’s gauge of employment at factories in the region also remained negative, though it improved to -1.8 from -7.4 in December. Overall, the Philly Fed report showed declining orders, longer delivery times, and falling inventories.

On inflation, the prices paid index within the survey fell to 43.4 from 51.8 last month. That indicates some easing of cost pressures for manufacturers in the region. The prices received or charged index also ticked lower.

The inflation figures align with the Fed’s latest nationwide look at the economy. The central bank’s Beige Book noted signs of slowing wage growth and easing price pressures. That could give the Fed cover to dial back the pace of interest rate hikes at upcoming meetings this year.

But policymakers also reiterated they plan to keep rates elevated for some time to ensure inflation continues cooling toward the 2% target. Markets still expect the Fed to lift rates again at both its February and March gatherings, albeit by smaller increments of 25 basis points.

With inflation showing increasing signs of moderating from four-decade highs, the focus turns to how much the Fed’s actions will slow economic growth. Thursday’s report on jobless claims hints the labor market remains on solid ground for now.

Employers added over 200,000 jobs per month on average in 2023, well above the pace needed to keep up with population growth. And the unemployment rate ended the year at 3.5%, matching a 50-year low first hit in September.

While job gains are expected to downshift in 2024, the claims report suggests employers are not rushing to cut staff yet. How long the resilience lasts as interest rates remain elevated and growth slows remains to be seen.

For the Fed, it will be a delicate balance between cooling the economy just enough to rein in inflation, without causing substantial job losses or triggering a recession. How well they thread that needle will be closely watched in 2024.

Treasury Yields Spike on Solid Retail Figures, Stocks Pull Back

Posted on by slightbourne@noblecapitalmarkets.com

U.S. stocks slumped on Wednesday as Treasury yields climbed following better-than-expected December retail sales. The data signals ongoing economic strength, prompting investors to temper hopes for an imminent Fed rate cut.

The S&P 500 dropped 0.47% to an over one-week low of 4,743, while the Dow shed 0.01% to hit a near one-month low of 37,357. The tech-heavy Nasdaq fared worst, sinking 0.79% to 14,826, its lowest level in a week.

Driving the declines was a surge in the 10-year Treasury yield, which topped 4.1% today – its highest point so far in 2024. The benchmark yield has been rising steadily this year as the Fed maintains its hawkish tone. Higher yields particularly pressured rate-sensitive sectors like real estate, which fell 1.8% for its worst day in a month.

The catalyst behind rising yields was stronger-than-forecast December retail sales. Despite lingering inflation, sales rose 1.4% versus estimates of just 0.1%, buoyed by holiday discounts and robust auto demand. The robust spending highlights the continued resilience of the U.S. economy amidst Fed tightening.

This data substantially dampened investor hopes of the Fed cutting rates as soon as March. Before the report, markets were pricing in a 55% chance of a 25 basis point cut next month. But expectations sank to just 40% after the upbeat sales print.

Traders have been betting aggressively on rate cuts starting in Q2 2024, while the Fed has consistently pushed back on an imminent policy pivot. Chair Jerome Powell stated bluntly last week that “the time for moderating rate hikes may come as soon as the next meeting or meetings.”

“The market is recalibrating its expectations for rate cuts, but I don’t think that adjustment is completely over,” said Annex Wealth Management’s Brian Jacobsen. “A tug-of-war is playing out between what the Fed intends and what markets want.”

Further weighing on sentiment, the CBOE Volatility Index spiked to its highest level in over two months, reflecting anxiety around the Fed’s path. More Fedspeak is due this week from several officials and the release of the Beige Book economic snapshot. These could reinforce the Fed’s resolute inflation fight and keep downward pressure on stocks.

In company news, Tesla shares dropped 2.8% after the electric vehicle leader slashed Model Y prices in Germany by roughly 15%. This follows discounts in China last week as signs of softening demand grow. The price cuts hit Tesla’s stock as profit margins may come under pressure.

Major banks also dragged on markets after Morgan Stanley plunged 2% following earnings. The investment bank flagged weak trading activity and deal-making. Peer banks like Citi, Bank of America and Wells Fargo slid as a result.

On the upside, Boeing notched a 1.4% gain as it cleared a key milestone regarding 737 MAX inspections. This allows the aircraft to reenter service soon, providing a boost to the embattled plane maker.

But market breadth overall skewed firmly negative, with decliners swamping advancers by a 3-to-1 ratio on the NYSE. All 11 S&P 500 sectors finished in the red, underscoring the broad risk-off sentiment.

With the Fed hitting the brakes on easy money, 2024 is shaping up to be a far cry from the bull market of 2021-2022. Bouts of volatility are likely as policy settles into a restrictive posture. For investors, focusing on quality companies with pricing power and adjusting rate hike expectations continue to be prudent moves this year.

JP Morgan Reigns Supreme with $50B Record Banking Profit in Tumultuous 2023

Posted on by slightbourne@noblecapitalmarkets.com

JPMorgan Chase, the nation’s largest bank, reported a 15% decline in fourth quarter 2023 earnings on Friday, weighed down by a massive $2.9 billion fee related to the government takeover of failed regional banks last year.

The bank posted profits of $9.31 billion, or $3.04 per share, for the final three months of 2023. This compared to earnings of $10.9 billion, or $3.33 per share, in the same period a year earlier. Excluding the regional banking crisis fee and other one-time items, JPMorgan said it earned $3.97 per share in the fourth quarter.

Total revenue for the quarter rose 12% to $39.94 billion, slightly above analyst forecasts. The jump was driven by the bank’s acquisition of First Republic Bank in late 2023, higher net interest income, and increased investment banking fees.

“The U.S. economy continues to be resilient, with consumers still spending, and markets currently expect a soft landing,” said JPMorgan CEO Jamie Dimon in a statement. “These significant and somewhat unprecedented forces cause us to remain cautious.”

Dimon cited high inflation, rising interest rates, out-of-control government spending, supply chain disruptions, the war in Ukraine, and tensions in the Middle East as potential threats to the economic outlook.

For the full year 2023, JPMorgan posted record profits of nearly $50 billion, including $4.1 billion from its acquisition of First Republic. The deal instantly gave JPMorgan a leading position in serving wealthy clients in California and other coastal markets.

Smaller Competitors Squeezed

While JPMorgan has deftly navigated the rising rate environment, smaller regional banks have struggled as the Federal Reserve hiked rates aggressively to combat inflation. Many were caught holding lower-yielding assets funded by higher-cost deposits. This squeezed net interest margins.

The regional banking crisis came to a head in early 2023 as a wave of defaults and bank seizures overwhelmed the FDIC insurance fund. JPMorgan and other large banks were handed the bill, with the FDIC levying $18 billion in special fees on the industry to recapitalize the fund.

Specifically, JPMorgan paid a $2.9 billion fee in the fourth quarter related to the FDIC assessments. This was a major factor in the bank’s profit decline compared to a year ago.

JPMorgan Cautious Despite Solid Year

Despite posting record full-year earnings, Dimon and JPMorgan management struck a cautious tone in their earnings release. While U.S. consumers remain resilient for now, risks are mounting.

Inflation could prove stickier than anticipated, forcing the Fed to keep rates higher for longer. The war in Ukraine shows no signs of resolution. Middle East conflicts continue to elevate oil prices. And the U.S. government is racking up huge deficits, with no political will to cut spending.

For banks, this backdrop could pressure lending activity, loan performance, and capital levels. Mortgage rates are already above 7%, denting the housing market. Credit card delinquencies are edging higher. Corporate debt looks vulnerable as businesses face slower growth and input cost pressures.

All of this warrants a cautious stance until more clarity emerges later this year.

With JPMorgan having reported solid results for 2023, investors are now focused on the bank’s outlook for 2024 amid an expected shift in the interest rate environment.

On Friday’s earnings call, analysts will be listening closely to hear JPMorgan’s projections and commentary around key items that could impact performance this year:

  • Net interest income guidance for 2024. As the Fed cuts rates, net interest margins may compress. But higher loan volumes could offset this.
  • Expectations for credit costs and loan losses. While credit metrics are healthy now, a weaker economy could strain consumers and corporate borrowers.
  • Thoughts on impending hikes to capital requirements. Banks are hoping to reduce the impact of new rules on capital buffers.
  • M&A landscape. Does JPMorgan see opportunities for deals amid lower valuations?
  • Plans for excess capital deployment. Investors want to hear about potential increases in buybacks, dividends, and other uses.

JPMorgan entered 2024 with strong capital levels, putting it in position to boost shareholder returns even with new regulations. Investors will be listening to hear how management plans to leverage JPMorgan’s financial strength in the year ahead.

The bank’s 2024 outlook will be critical in determining whether its stock can build on last year’s big gains. JPMorgan was the top performing Dow stock in 2023, and investors are betting it can continue to drive profits in a more subdued rate environment.

Inflation Rises More Than Expected in December, Keeping Pressure on Fed

Posted on by slightbourne@noblecapitalmarkets.com

Inflation picked up more than anticipated in December, dimming hopes that the Federal Reserve can soon pause its interest rate hiking campaign.

The Consumer Price Index (CPI) rose 0.3% in December compared to the prior month, according to Labor Department data released Thursday. Economists surveyed by Bloomberg had projected a 0.2% monthly gain.

On an annual basis, inflation hit 3.4% in December, accelerating from November’s 3.1% pace and surpassing expectations for 3.2% growth.

The uptick keeps the heat on the Fed to maintain its aggressive monetary tightening push to wrestle inflation back towards its 2% target. Investors were optimistic the central bank could stop hiking rates and even start cutting them in early 2023. But with inflation proving sticky, the Fed now looks poised to keep benchmark rates elevated for longer.

“This print is aligned with our view that disinflation ahead will be gradual with sticky services inflation,” said Ellen Zentner, chief U.S. economist at Morgan Stanley, in a note.

Core Contributes to Inflation’s Persistence

Stripping out volatile food and energy costs, the core CPI increased 0.3% in December, matching November’s rise. Core inflation rose 3.9% on an annual basis, up slightly from November’s 4.0% pace.

The core reading came in above estimates for a 0.2% monthly gain and 3.8% annual increase. The higher-than-expected core inflation indicates that even excluding food and gas, costs remain stubbornly high across many categories of goods and services.

Shelter costs are a major culprit, with rent indexes continuing to climb. The indexes for rent of shelter and owners’ equivalent rent both advanced 0.5% in December, equaling November’s rise.

Owners’ equivalent rent attempts to estimate how much homeowners would pay if they rented their properties. This category accounts for nearly one-third of the overall CPI index and over 40% of core CPI.

With shelter carrying so much weighting, persistent gains here will hinder inflation’s descent. Supply-demand imbalances in the housing market are delaying a moderation in rents.

Used Cars See Relief; Insurance Soars

Gently easing price pressures showed up in the used vehicle market. Used car and truck prices edged up just 0.1% in December following several months of declines. In November, used auto prices fell 0.2%.

New vehicle prices also cooled again, dipping 0.1% versus November’s 0.2% decrease. The reprieve comes after a long bout of supply shortages weighed on auto affordability.

But motor vehicle insurance blindsided with its largest annual increase since 1976, vaulting 20.3% higher over the last 12 months. In November, the insurance index had risen 8.7% year-over-year.

Food Index Fluctuates

Food prices have been especially volatile, reacting to supply chain disruptions and geopolitical developments like the war in Ukraine. The food index rose 0.1% in December, down from November’s 0.5% increase.

The index for food at home slid 0.1% last month, reversing course after four straight monthly gains. Egg prices spiked 8.9% higher in December, building on November’s 2.2% surge. The egg index has skyrocketed 60% year-over-year.

But not all grocery aisles saw rising costs. Fruits and vegetables turned cheaper, with the index dropping 0.6% as supply conditions improved.

Bigger Picture View

The faster-than-expected inflation in December keeps the Fed on course to drive rates higher for longer to manage price pressures. Markets are still betting officials will engineer a soft landing and start cutting interest rates by March.

But economists warn more patience is needed before declaring victory over inflation. “Overall, the December CPI report reminds us that inflation will decline on a bumpy road, not a smooth one,” said Jeffrey Roach, chief economist at LPL Financial.

Until clear, convincing signs of disinflation emerge, the Fed looks unlikely to pivot from its aggressive inflation-fighting stance. The CPI report illustrates the complexity of the inflation picture, with some components moderating while others heat up.

With shelter costs up over 6% annually and services inflation staying elevated, the Fed has reasons for caution. Moderately higher inflation won’t necessarily prompt more supersized rate hikes, but it may prolong the current restrictive policy.

Investors longing for a Fed “pivot” may need to wait a bit longer. But the war against inflation rages on, even with the December CPI report threatening to squash hopes of an imminent policy easing.