Tag: Economy

Investors Await Powell’s Speech for Cues on Future Rate Hikes

Posted on by slightbourne@noblecapitalmarkets.com

Federal Reserve Chair Jerome Powell is set to deliver a closely watched speech on Thursday before the Economic Club of New York that could offer critical guidance on the future path of monetary policy.

Markets are looking for clarity from Powell on how the Fed plans to balance improving inflation data against surging Treasury yields and risks of recession. His remarks come at a precarious time – inflation shows early signs of easing but remains well above the Fed’s 2% target, while rapidly rising interest rates threaten to slow economic growth.

Powell faces the tricky task of conveying that the Fed remains vigilant in combating inflation while avoiding cementing expectations for further aggressive rate hikes that could hammer markets.

“Powell has to present himself to investors as the dispassionate neutral leader and allow others to be more aggressive,” said Jeffrey Roach, chief economist at LPL Financial. “They’re not going to declare victory, and that is one reason why Powell is going to continue to talk somewhat hawkish.”

Cues from within the Fed have been mixed recently. Several officials, including Philadelphia Fed President Patrick Harker, have advocated holding fire on rate hikes temporarily to evaluate incoming data. This “wait and see” approach comes after a torrent of large rate increases this year, with the Fed Funds rate now sitting at a 15-year high of 3.75%-4%.

But hawkish voices like New York Fed President John Williams insist the Fed must keep policy restrictive for some time to combat inflation. Markets hope Powell will provide definitive guidance on the prevailing consensus within the central bank.

Policymakers are navigating a complex environment. Inflation data has been gradually improving from 40-year highs earlier this year. But inflation expectations remain uncomfortably high, pointing to the need for further tightening.

“Powell has to present the recent inflation data as welcome news, but not evidence that the job is done,” said Ryan Sweet, chief U.S. economist at Oxford Economics. “The Fed still has more work to do.”

At the same time, the rapid rise in Treasury yields in recent weeks has already tightened financial conditions substantially. Another massive rate hike could be unnecessary overkill.

According to Krishna Guha of Evercore ISI, Powell will likely underscore “that the data has been coming in stronger than expected, but there has also been a big move in yields, which has tightened financial conditions, so no urgency for a policy response in November.”

Markets are currently pricing in a 65% chance that rates remain on hold at next month’s policy meeting. But there is still roughly a one-in-three chance of another 0.75 percentage point hike.

All eyes will be parsing Powell’s speech for any clues or direct guidance on the Fed’s next steps. While he is expected to avoid concrete commitments, his language choices will be dissected for shifts in tone or any hints at changes in thinking around the policy trajectory.

Powell’s remarks will also be scrutinized for takeaways on how long the Fed may need to keep rates elevated before ultimately cutting. Luke Tilley of Wilmington Trust expects Powell “to keep talking about staying vigilant” and the need for rates to remain higher for longer to ensure inflation comes down sustainably.

With growing recession fears on Main Street and Wall Street, Powell faces a defining moment to communicate a clear roadmap of where monetary policy is headed, while retaining flexibility. Walking this tightrope will be critical to shoring up the Fed’s credibility and avoiding unnecessary market turmoil.

All eyes are on the Fed chair tomorrow as investors and economists eagerly await guidance from the man himself holding the levers over the world’s most influential interest rate.

Surprisingly Strong September Retail Sales Raises Hopes for Soft Landing

Posted on by slightbourne@noblecapitalmarkets.com

U.S. retail sales rose an unexpectedly robust 0.7% in September, surpassing economist forecasts of a flat or negative number. The solid spending data provides a dose of optimism that the economy can achieve a soft landing amidst high inflation and aggressive Fed rate hikes.

September’s gains were broad-based across categories like autos, gasoline, furniture, clothing, hobbies, and food services. The growth comes even as inflation persists at elevated levels, with the September Consumer Price Index report showing prices climbed 8.2% year-over-year.

However, the 0.4% monthly CPI increase was smaller than anticipated. This potentially indicates inflationary pressures are beginning to gradually ease.

Markets rallied on the retail sales beat, interpreting it as a sign of consumer resilience despite inflation chipping away at budgets. Stocks rose on hopes a soft landing—where the Fed engineers an economic cooldown without triggering a recession—appears more plausible.

Retail spending has seesawed in recent months, decreasing 0.4% in August as high prices at the pump drained consumer budgets. But gas prices have since moderated, alleviating some of this pressure. This freed up disposable income in September, evidenced by solid auto sales and increases in discretionary categories.

The better-than-expected data implies consumers still have some power to prop up the economy, though inflation remains a challenge. Prices dipped from the previous month’s 8.3% annual increase but continue running severely above the Fed’s 2% target. This explains why the central bank is almost certain to enact another large interest rate hike in early November.

Fed officials assert they will continue raising rates aggressively until inflation is convincingly tamed. This risks going too far and sparking a recession. But if inflation keeps gradually trending downwards, it raises confidence the Fed can stick the landing.

Firms are bracing for a potential downturn, with many announcing hiring freezes and cost cuts. However, the job market has yet to take a significant hit, which would severely impair consumer spending power. As long as individuals keep spending reasonably well, it makes a soft landing more feasible.

Looking ahead, the path for retail sales and inflation remains highly uncertain. More data will be required to determine if September’s retail boost was an anomaly or the start of more sustainable momentum. Inflation similarly needs to keep dropping before proclaiming victory.

But for now, September’s numbers provide a dose of positivity that the economy is not yet on the brink of cratering into recession. Consumers are weathering the inflation storm better than feared, aided by falling gas prices and healthy job gains.

This means the Fed can continue ratcheting up interest rates with less risk of immediately crashing growth. However, policymakers are unlikely to declare mission accomplished and halt hikes anytime soon.

For the soft landing narrative to play out, retail strength and inflation moderation will need to persist over coming months. September offered promising signs, but more evidence is required to confidently say a harsh recession is avoidable. The Fed will be monitoring data closely to ensure its forceful actions steer the economy in the right direction.

Biden Administration Unveils $7 Billion Investment in Regional Hydrogen Hubs

Posted on by slightbourne@noblecapitalmarkets.com

The Biden administration is making a major push to develop a domestic hydrogen economy by funding 7 regional hydrogen hubs across the United States. The hubs will share up to $7 billion in federal funding aimed at spurring hydrogen production and use.

President Joe Biden and Energy Secretary Jennifer Granholm announced Friday the selection of hubs in Appalachia, California, the Gulf Coast, the Heartland, Mid-Atlantic, Midwest, and Pacific Northwest regions. The funds come from last year’s Bipartisan Infrastructure Law.

Accelerating the Hydrogen Economy

The goal is to accelerate the growth of a clean hydrogen industry in the U.S. Hydrogen is a versatile fuel seen as a critical tool for decarbonizing major sectors like heavy industry, transportation, and power generation.

When produced using low-carbon methods, hydrogen can provide emissions-free energy for hard-to-abate sectors. Expanding hydrogen is a key plank of the Biden administration’s strategy to cut greenhouse gas emissions and combat climate change.

The 16-state regional hubs model fosters clusters of hydrogen supply and demand, minimizing transportation needs. The administration expects the $7 billion federal injection to mobilize over $43 billion in private capital.

Leveraging Regional Strengths

Each hydrogen hub leverages unique geographic strengths ideal for clean hydrogen production. For example:

  • The Appalachia Hub will use the region’s abundant natural gas supply, applying carbon capture to lower emissions.
  • California and the Pacific Northwest have access to seaports critical for shipping hydrogen.
  • The Heartland can utilize wind resources to produce hydrogen via electrolysis.
  • The Midwest Hub will tap into nuclear power to make hydrogen.

In addition to production, the regional hubs focus on cultivating local hydrogen markets. Some will provide hydrogen for industrial uses while others may focus on fertilizer or fuel cell vehicle growth.

Building on Bipartisan Policy

The hydrogen hub funding originated from the bipartisan infrastructure package passed in 2021. The law included $8 billion for at least four regional hubs.

The Biden administration expanded the program to seven hubs to extend geographic impact. The policy builds on bipartisan support for advancing hydrogen in the U.S.

Last year’s Infrastructure Investment and Jobs Act also created a hydrogen production tax credit. The recently passed Inflation Reduction Act further boosted hydrogen incentives with an additional $3 per kg production credit.

The Energy Department will provide guidance on utilizing the tax credits later this year. The credits will aid long-term viability of the regional hubs.

Spurring Private Investment

The federal money is intended to galvanize substantial private capital investment in building out hydrogen infrastructure. Siting hydrogen hubs near key anchor facilities can spur economic growth.

For example, California’s hub grants will likely stimulate billions in private funding around port facilities. Financial incentives like the hydrogen tax credits create ideal conditions for private sector buy-in.

Over time, decreasing costs through scale and technology improvements could make hydrogen competitive with conventional fuels. The regional hubs represent a starting point designed to nurture both supply and demand.

Next Steps for Growth

The hydrogen hubs mark an important early phase of U.S. efforts to scale up the hydrogen economy. Biden administration officials noted work remains to develop connective infrastructure and further applications.

Ongoing policy support via research funding, incentives, and enabling regulation will help drive growth. Continued bipartisan cooperation around hydrogen could lead to additional catalytic investments.

With the right policy environment, hydrogen could become a major pillar of America’s clean energy economy. The regional hubs represent a down payment on the infrastructure needed to realize hydrogen’s vast decarbonization potential across the economy.

Rising Housing Costs Drive Consumer Inflation Even Higher in September

Posted on by slightbourne@noblecapitalmarkets.com

Consumer inflation accelerated more than expected in September due largely to intensifying shelter costs, putting further pressure on household budgets and keeping the Federal Reserve on high alert.

The consumer price index (CPI) increased 0.4% last month after rising 0.1% in August, the Labor Department reported Thursday. On an annual basis, prices were up 3.7% through September.

Both the monthly and yearly inflation rates exceeded economist forecasts of 0.3% and 3.6% respectively.

The higher than anticipated inflation extends the squeeze on consumers in the form of elevated prices for essentials like food, housing, and transportation. It also keeps the Fed under the microscope as officials debate further interest rate hikes to cool demand and restrain prices.

Source: U.S. Bureau of Labor Statistics

Surging Shelter Costs in Focus

The main driver behind the inflation uptick in September was shelter costs. The shelter index, which includes rent and owners’ equivalent rent, jumped 0.6% for the month. Shelter costs also posted the largest yearly gain at 7.2%.

On a monthly basis, shelter accounted for over half of the total increase in CPI. Surging rents and housing costs reflect pandemic trends like strong demand amid limited supply.

“Just because the rate of inflation is stable for now doesn’t mean its weight isn’t increasing every month on family budgets,” noted Robert Frick, corporate economist at Navy Federal Credit Union. “That shelter and food costs rose particularly is especially painful.”

Energy and Food Costs Also Climb

While shelter led the inflation surge, other categories saw notable increases as well in September. Energy costs rose 1.5% led by gasoline, fuel oil, and natural gas. Food prices gained 0.2% for the third consecutive month, with a 6% jump in food away from home.

On an annual basis, energy costs were down 0.5% but food was up 3.7% year-over-year through September.

Used vehicle prices declined 2.5% in September but new vehicle costs rose 0.3%. Overall, transportation services inflation eased to 0.9% annually in September from 9.5% in August.

Wage Growth Lags Inflation

Rising consumer costs continue to outpace income growth, squeezing household budgets. Average hourly earnings rose just 0.2% in September, not enough to keep pace with the 0.4% inflation rate.

That caused real average hourly earnings to fall 0.2% last month. On a yearly basis, real wages were up only 0.5% through September—a fraction of the 3.7% inflation rate over that period.

American consumers have relied more heavily on savings and credit to maintain spending amid high inflation. But rising borrowing costs could limit their ability to sustain that trend.

Fed Still Focused on Inflation Fight

The hotter-than-expected CPI print keeps the Fed anchored on inflation worries. Though annual inflation has eased from over 9% in June, the 3.7% rate remains well above the Fed’s 2% target.

Officials raised interest rates by 75 basis points in both September and November, pushing the federal funds rate to a range of 3-3.25%. Markets expect another 50-75 basis point hike in December.

Treasury yields surged following the CPI report, reflecting ongoing inflation concerns. Persistently high shelter and food inflation could spur the Fed to stick to its aggressive rate hike path into 2023.

Taming inflation remains the Fed’s number one priority, even at the risk of slowing economic growth. The latest CPI data shows they still have work to do on that front.

All eyes will now turn to the October and November inflation reports heading into the pivotal December policy meeting. Further hotter-than-expected readings could force the Fed’s hand on more supersized rate hikes aimed at cooling demand and prices across the economy.

IMF Economic Outlook: U.S. Growth Revised Up, Europe Down

Posted on by slightbourne@noblecapitalmarkets.com

The International Monetary Fund (IMF) recently released its updated World Economic Outlook report, providing insights into global economic projections. A key theme is diverging fortunes for major economies like the United States and Europe.

The IMF upgraded its 2023 GDP growth forecast for the U.S. to 2.1%, up 0.3 percentage points from its prior estimate. The upbeat revision reflects resilience in areas like business investment and consumer spending despite high inflation and interest rates. However, growth is still seen slowing in 2023 and 2024 as the impacts of tightening policy kick in.

Meanwhile, the IMF downgraded the euro zone 2023 outlook to 0.7% growth, 0.2 percentage points lower than previously expected. Slowing trade and higher rates are severely impacting Germany, while other euro economies face varied challenges. The IMF predicts gradual euro zone growth recovery to 1.2% in 2024, though still below pre-pandemic levels.

For the U.K., the IMF upgraded near-term growth slightly to 0.5% in 2023 but lowered its 2024 forecast on expectations of lingering damage from energy price shocks. The U.K. faces a difficult road ahead.

Overall, the IMF kept its global growth outlook unchanged at 3% for 2023. This sluggish pace reflects myriad headwinds including inflation, tight monetary policy, supply chain issues, and the war in Ukraine. IMF Chief Economist Gourinchas described the global economy as “limping along” below its pre-pandemic trend.

Positives like easing supply chain bottlenecks, lower Covid impacts, and stabilizing financial conditions will provide some uplift. But manufacturing and services slowdowns, synchronized central bank tightening, and China’s property crisis will constrain growth.

For investors, the IMF outlook sends mixed signals. U.S. economic resilience and continued consumer strength provide room for cautious optimism. But Europe’s downward revision and pervasive global headwinds like inflation suggest ongoing volatility and potential bumps ahead.

This outlook underscores the importance of defensive positioning and safe haven assets to balance riskier equities. Key takeaways for investors include:

  • Focus on U.S. sectors and stocks benefitting from higher business and consumer spending.
  • Tread carefully in Europe as weaker growth hits markets. Emphasize quality multinationals with less cyclical dependence.
  • Inflation and interest rates will remain challenges influencing markets and consumer behavior.
  • China’s faltering growth and property bubble pose threats worth monitoring.
  • Pay close attention to recession signals that could shift IMF forecasts and alter market psychology.

While the global economy is still expanding, momentum is slowing with many obstacles to navigate. Investors should build resilient portfolios capable of withstanding volatile conditions, while staying alert for any deterioration that could change the IMF’s cautious optimism.

Jobs Report Rockets Past Wall Street Estimates

Posted on by slightbourne@noblecapitalmarkets.com

The September jobs report revealed the U.S. economy added 336,000 jobs last month, nearly double expectations. The data highlights the resilience of the labor market even as the Federal Reserve aggressively raises interest rates to cool demand.

Economists surveyed by Bloomberg had forecast 170,000 job additions for September. The actual gain of 336,000 jobs suggests the labor market remains strong despite broader economic headwinds.

The unemployment rate held steady at 3.8%, unchanged from August and still near historic lows. This shows employers continue hiring even amid rising recession concerns.

Wage growth moderated but still increased 0.3% month-over-month and 5.0% year-over-year. Slowing wage gains may reflect reduced leverage for workers as economic uncertainty increases.

The report reinforces the tight labor market conditions the Fed has been hoping to loosen with its restrictive policy. Rate hikes aim to reduce open jobs and slow wage growth to contain inflationary pressures.

Yet jobs growth keeps exceeding forecasts, defying expectations of a downshift. The Fed wants to see clear cooling before it eases up on rate hikes. This report suggests its work is far from done.

The September strength was broad-based across industries. Leisure and hospitality added 96,000 jobs, largely from bars and restaurants staffing back up. Government employment rose 73,000 while healthcare added 41,000 jobs.

Source: U.S. Bureau of Labor Statistics via CNBC

Upward revisions to July and August payrolls also paint a robust picture. An additional 119,000 jobs were created in those months combined versus initial estimates.

Markets are now pricing in a reduced chance of another major Fed rate hike in November following the jobs data. However, resilient labor demand will keep pressure on the central bank to maintain its aggressive tightening campaign.

While the Fed has raised rates five times this year, the benchmark rate likely needs to go higher to materially impact hiring and wage trajectories. The latest jobs figures support this view.

Ongoing job market tightness suggests inflation could become entrenched at elevated levels without further policy action. Businesses continue competing for limited workers, fueling wage and price increases.

The strength also hints at economic momentum still left despite bearish recession calls. Job security remains solid for many Americans even as growth slows.

Of course, the labor market is not immune to broader strains. If consumer and business activity keep moderating, job cuts could still materialize faster than expected.

For now, the September report shows employers shaking off gloomier outlooks and still urgently working to add staff and retain workers. This resiliency poses a dilemma for the Fed as it charts the course of rate hikes ahead.

The unexpectedly strong September jobs data highlights the difficult balancing act the Fed faces curbing inflation without sparking undue economic damage. For policymakers, the report likely solidifies additional rate hikes are still needed for a soft landing.

Crisis Averted: Government Stays Open

Posted on by slightbourne@noblecapitalmarkets.com

By averting a government shutdown, Congress has avoided rocking both the economy and financial markets. Shutting down federal operations would have created widespread uncertainty and turbulence. Instead, the move offers stability and continuity as the economy faces broader headwinds.

With virtually all government functions continuing normal operations, economic data releases, services, and programs will not face disruptions. Past shutdowns caused delays in economic reports, processing visa and loan applications, releasing small business aid, and more. These disruptions introduce friction that can dampen economic momentum.

Federal employees will continue receiving paychecks rather than facing furloughs. The last major shutdown in 2018-2019 resulted in 380,000 workers being furloughed. With over 2 million federal employees nationwide, even a partial shutdown can reduce economic activity from lost wages.

Government contractors also avoid financial duress from suspended contracts and payments. Many contractors faced cash flow crises during the 2018 shutdown as the government stopped paychecks. Reduced revenues directly hit company bottom lines.

Consumer and business confidence are likely to be maintained without the dysfunction of a funding gap. Surveys showed confidence dropped during past shutdowns as uncertainty rose. Lower confidence can make households and businesses reduce spending and investment, slowing growth.

The tourism industry does not have to contend with closing national parks, museums and monuments. The 2013 shutdown caused sites like the Statue of Liberty to close, resulting in lost revenue for vendors, hotels, and airlines. These impacts radiate through the economy.

Markets also benefit from reduced policy uncertainty. The 2011 debt ceiling showdown and 2018-2019 shutdown both introduced volatility as deadlines approached. Equities fell sharply in the final weeks of the 2018 impasse. While shutdowns alone don’t determine market trends, they contribute an unnecessary headwind.

With recent stock volatility driven by inflation and recession concerns, averting a shutdown provides one less factor to potentially spook markets. Traders never like surprises, and shutdowns heighten unpredictability.

On a sector basis, federal contractors and businesses leveraged to consumer spending stand to benefit most from the avoided disruption. Aerospace and defense firms like Lockheed Martin and Northrop Grumman rely heavily on federal budgets. Consumer discretionary retailers and restaurants avoid lost sales from furloughed workers tightening budgets.

While shutdowns impose only marginal economic impact when brief, longer impasses can impose meaningful fiscal drags. The 16-day 2013 shutdown shaved 0.3% from that quarter’s GDP growth. The longer the stalemate, the greater the economic fallout.

Overall, with myriad headwinds already facing the economy in inflation, rising rates, and recession risks, avoiding a shutdown removes one variable from the equation. While defaulting on the national debt would produce far graver consequences, shutdowns still introduce unnecessary turbulence.

By staving off even a short-term shutdown, Congress helps maintain economic and market stability at a time it’s especially needed. This provides a breather after policy uncertainty spiked leading up to the shutdown deadline. While myriad challenges remain, at least this box has been checked, for now.

Student Loan Payments Resume

Posted on by slightbourne@noblecapitalmarkets.com

After nearly 3 years of reprieve, student loan payments are set to restart on October 1, 2023. However, the landscape looks much different thanks to sweeping changes made by the Biden administration. These alterations have made student debt more manageable and offered routes to accelerated payoff or even forgiveness that didn’t exist before.

The impact could extend beyond individual borrowers to provide a boost to the overall economy. With less income eaten up by student loan payments, borrowers will have more spending power. That additional discretionary income circulating through the economy acts as a stimulus.

Perhaps the most impactful change was the elimination of interest capitalization in most cases. This is the process where unpaid interest gets added to the loan balance, causing it to balloon. Now, interest no longer capitalizes when borrowers exit forbearance, leave income-driven repayment plans, or have other status changes. Only when exiting deferment on unsubsidized loans does interest get added to principal. This prevents balances from spiraling out of control.

Biden has also dramatically expanded access to forgiveness. Over 3 million borrowers have already had loans discharged through revamps of programs like Public Service Loan Forgiveness and income-driven repayment. The former saw its complex rules simplified, while the latter had payment counts adjusted and forbearance periods now qualifying for credit. These tweaks pushed many over the line into immediate forgiveness.

Even borrowers who don’t qualify for these programs have an easier time discharging loans through bankruptcy. New guidelines tell government lawyers not to oppose bankruptcy discharge requests that meet certain criteria laid out in a 15-page form. This makes the previously rare “undue hardship” determination more accessible.

The administration also implemented a 1-year “on ramp” where missed payments don’t negatively impact credit or trigger default. This grace period offers struggling borrowers a clean slate before consequences kick in again.

Those able to resume payments may even benefit from today’s high interest rates. Federal student loans have fixed low rates, so borrowers can pay them down faster by investing in treasury notes earning far higher returns. Inflation likewise reduces the real burden of student debt over time.

While these changes have brought tangible individual relief, broadly reducing the student debt burden could also provide a macroeconomic boost. Money freed up in household budgets gets spent elsewhere, circulating through and stimulating the economy.

The Biden administration still wants to enact broad student debt cancellation for this very reason. After the Supreme Court blocked its forgiveness plan, the Department of Education launched “negotiated rulemaking” to find another path. This bureaucratic process involving public committees aims to deliver a new cancellation proposal in late 2024.

Until then, the reshaped student loan landscape gives borrowers breathing room. The structural changes determine whether student debt remains a crushing burden or becomes manageable.

With interest capitalization curbed and expanded opportunities for discharge, balances can actually shrink instead of endlessly growing. The credit safeguards offer wiggle room to get finances in order before consequences hit. And the door to forgiveness has been opened wider than ever before.

Of course, these alterations won’t instantly solve every borrower’s problems. But they provide avenues for relief that didn’t exist previously. And more importantly, they signal a philosophical shift that student debt shouldn’t ruin lives or constrain futures.

There’s still work to be done, like making income-driven repayment more accessible and adding guardrails to limit excessive debt. But the momentum is towards a system that helps borrowers succeed rather than burying them in interest and unpayable balances.

So while student loan repayment is resuming, borrowers can take heart that it’s restarting under a fairer set of rules. The old grind of watching debt balloon while relief remained elusive has thankfully been left behind. With a potential wider economic stimulus, these changes could benefit more than just student borrowers.

August PCE Index Release Suggests Slower Pace of Inflation Growth

Posted on by cpatches

Today’s news brings the release of the August data for the Personal Consumption Expenditures (PCE) Index by the U.S. Bureau of Economic Analysis. This report, a crucial indicator of inflation and consumer spending in the United States, has set a positive tone for financial markets as they rally in early trading.

In August, the PCE Index recorded a year-over-year growth rate of 3.5%, showing a modest increase from the previous month’s 3.4%. On a monthly basis, the core PCE, the Federal Reserve’s preferred measure of inflation, inched up by 0.1%, slightly lower than the 0.2% increase in July.

The Federal Reserve has long regarded the core PCE as its favored measure of inflation. While the August PCE report has provided insight into inflation trends, it’s important to note that the Fed made a decision to keep interest rates steady earlier this week. Federal Reserve Chair Jerome Powell consistently references the core PCE figures when assessing inflation. Powell has emphasized that inflation remains above the Fed’s 2% target, which has informed the central bank’s recent decision to maintain interest rates within a range of 5.25%-5.50%. This decision underscores the Fed’s cautious approach to managing inflation while fostering economic growth.

Historically, PCE reports have played a significant role in guiding monetary policy and influencing market dynamics. When inflationary pressures rise, the Fed may respond by raising interest rates to curb price increases. Conversely, when PCE growth moderates, the central bank may opt for rate cuts to stimulate economic activity.

While the report suggests a slower pace of inflation growth in August compared to July, inflation remains a pertinent issue. Investors will closely monitor subsequent reports and Federal Reserve actions to gain insight into the trajectory of inflation and its potential impact on financial markets and the broader economy. The early market rally reflects the market’s optimism following the release of the latest PCE data, as it continues to navigate the evolving economic landscape.

Fed Keeping Rates Higher Despite Pausing Hikes For Now

Posted on by slightbourne@noblecapitalmarkets.com

The Federal Reserve left interest rates unchanged on Wednesday but projected keeping them at historically high levels into 2024 and 2025 to ensure inflation continues falling from four-decade highs.

The Fed held its benchmark rate steady in a target range of 5.25-5.5% following four straight 0.75 percentage point hikes earlier this year. But officials forecast rates potentially peaking around 5.6% by year-end before only gradually declining to 5.1% in 2024 and 4.6% in 2025.

This extended timeframe for higher rates contrasts with prior projections for more significant cuts starting next year. The outlook underscores the Fed’s intent to keep monetary policy restrictive until inflation shows clearer and more persistent signs of cooling toward its 2% target.

“We still have some ways to go,” said Fed Chair Jerome Powell in a press conference, explaining why rates must remain elevated amid still-uncertain inflation risks. He noted the Fed has hiked rates to restrictive levels more rapidly than any period in modern history.

The Fed tweaked its economic forecasts slightly higher but remains cautious on additional tightening until more data arrives. The latest projections foresee economic growth slowing to 1.5% next year with unemployment ticking up to 4.1%.

Core inflation, which excludes food and energy, is expected to fall from 4.9% currently to 2.6% by late 2023. But officials emphasized inflation remains “elevated” and “unacceptably high” despite moderating from 40-year highs earlier this year.

Consumer prices rose 8.3% in August on an annual basis, down from the 9.1% peak in June but well above the Fed’s 2% comfort zone. Further cooling is needed before the Fed can declare victory in its battle against inflation.

The central bank is proceeding carefully, pausing rate hikes to assess the cumulative impact of its rapid tightening this year while weighing risks. Additional increases are likely but the Fed emphasized future moves are data-dependent.

“In coming months policy will depend on the incoming data and evolving outlook for the economy,” Powell said. “At some point it will become appropriate to slow the pace of increases” as the Fed approaches peak rates.

For now, the Fed appears poised to hold rates around current levels absent a dramatic deterioration in inflation. Keeping rates higher for longer indicates the Fed’s determination to avoid loosening prematurely before prices are fully under control.

Powell has reiterated the Fed is willing to overtighten to avoid mistakes of the 1970s and see inflation fully tamed. Officials continue weighing risks between high inflation and slower economic growth.

“Restoring price stability while achieving a relatively modest increase in unemployment and a soft landing will be challenging,” Powell conceded. “No one knows whether this process will lead to a recession.”

Nonetheless, the Fed chief expressed optimism that a severe downturn can still be avoided amid resilient household and business spending. The labor market also remains strong with unemployment at 3.7%.

But the housing market continues to soften under the weight of higher rates, a key channel through which Fed tightening slows the economy. And risks remain tilted to the downside until inflation demonstrably falls closer to target.

For markets, clarity that rates will stay elevated through 2024 reduces uncertainty. Stocks bounced around after the Fed’s announcement as investors processed the guidance. The path forward depends on incoming data, but the Fed appears determined to keep rates higher for longer.

The Perfect Storm Brewing in US Housing

Posted on by slightbourne@noblecapitalmarkets.com

A perfect storm is brewing in the US housing market. Mortgage rates have surged above 7% just as millennials, the largest generation, reach peak homebuying age. This collision of rising interest rates and unmet demand is causing substantial disruption, as seen in the sharp decline in home sales, cautious builders and a looming affordability crisis that threatens the broader economy.

Mortgage rates have taken off as the Federal Reserve aggressively raises interest rates to fight inflation. The average 30-year fixed rate recently hit 7.18%, according to Freddie Mac, the highest level since 2001. This has severely hampered housing affordability and demand. Fannie Mae, the mortgage finance giant, forecasts total home sales will drop to 4.8 million this year, the slowest pace since 2011 when the housing market was still recovering from the Great Recession.

Fannie Mae expects sales to struggle through 2024 as rates remain elevated. It predicts the US economy will enter a recession in early 2024, further dragging down the housing market. Home prices are also likely to drop as high rates impede sales. This could hurt consumer confidence and discretionary spending, considering the critical role housing plays in household wealth.

Higher rates have pumped up monthly mortgage payments and made homes less affordable. Take a $500,000 home purchased with a 20% down payment. At a 2.86% mortgage rate two years ago, the monthly payment would have been $1,656. With rates now at 7.18%, that same home has a monthly cost of $3,077, according to calculations by Axios. That 87% payment surge makes purchasing unattainable for many buyers.

These affordability challenges are hitting just as millennials reach peak homebuying age. The largest cohorts of this generation were born in the late 1980s and early 1990s, making them between 32 and 34 years old today. That’s when marriage, childbearing and demand for living space typically accelerate.

However, homebuilders have been reluctant to significantly ramp up construction with rates so high. Housing starts experienced a significant decline of 11.3% in August, according to Census Bureau data, driven by a decline in apartment buildings. Single-family starts dipped 4.3% to an annual pace of 941,000, 16% below the average from mid-2020 to mid-2022. Homebuilder sentiment has also plunged, according to the National Association of Home Builders.

Take a look at Orion Group Holdings Inc., a leading specialty construction company servicing the infrastructure, industrial and building sectors.

This pullback in new construction comes even as there is strong interest from millennials and other buyers. Though mortgage rates moderated the overheated housing market earlier this year, national home prices remain just below their all-time highs, up 13.5% from two years ago, according to the S&P Case-Shiller index.

Some analysts say the only solution is to significantly boost supply. But that seems unlikely with builders cautious and financing costs high. The housing crisis has no quick fix and will continue to be an anchor on the broader economy. Millennials coming of age and mortgage rates spiraling upwards have sparked a perfect storm, broken the housing market, and darkened the country’s economic outlook.

High Gas Prices Return, Complicating Inflation Fight

Posted on by slightbourne@noblecapitalmarkets.com

Pain at the pump has made an unwelcome return, with gas prices rapidly rising across the United States. The national average recently climbed to $3.88 per gallon, while some states now face prices approaching or exceeding $6 per gallon.

In California, gas prices have spiked to $5.79 on average, up 31 cents in just the past week. It’s even worse in metro Los Angeles where prices hit $6.07, a 49 cent weekly jump. Besides California, drivers in 11 states now face average gas prices of $4 or more.

This resurgence complicates the Federal Reserve’s fight against high inflation. Oil prices are the key driver of retail gas costs. With oil climbing back to $90 per barrel, pushed up by supply cuts abroad, gas prices have followed.

West Texas Intermediate crude rose to $93.74 on Tuesday, its highest level in 10 months, before retreating below $91 on Wednesday. The international benchmark Brent crude hit highs above $96 per barrel. Goldman Sachs warned Brent could reach $107 if OPEC+ nations don’t unwind production cuts.

For consumers, higher gas prices add costs and sap purchasing power, especially for lower-income families. Drivers once again face pain filling up their tanks. Households paid an average of $445 a month on gas during the June peak when prices topped $5 a gallon. That figure dropped to $400 in September but is rising again.

Politically, high gas also causes headaches for the Biden administration. Midterm voters tend to blame whoever occupies the White House for pain at the pump, whether justified or not. President Biden has few tools to immediately lower prices set by global markets.

Take a look at other energy companies by taking a look at Noble Capital Markets Research Analyst Michael Heim’s coverage list.

However, economists say oil and gas prices must rise significantly further to seriously jeopardize the U.S. economy. Past recessions only followed massive oil price spikes of at least 100% within a year. Oil would need to double from current levels, to around $140 per barrel, to inevitably tip the economy into recession, according to analysis.

Nonetheless, the energy resurgence does present challenges for the Fed’s inflation fight. While core inflation has cooled lately, headline inflation has rebounded in part due to pricier gas. Consumer prices rose 0.1% in August, defying expectations of a drop, largely because of rising shelter and energy costs.

This complicates the Fed’s mission to cool inflation through interest rate hikes. Some economists believe the energy volatility will lead the Fed to pencil in an additional quarter-point rate hike this year to around 4.5%. However, a dramatic policy response is unlikely with oil still below $100 per barrel.

In fact, some argue the energy spike may even inadvertently help the Fed. By sapping consumer spending power, high gas prices could dampen demand and ease price pressures. If energy costs siphon purchases away from discretionary goods and services, it may allow inflation to fall without more aggressive Fed action.

Morgan Stanley analysis found past energy price shocks had a “small” impact on core inflation but took a “sizable bite out of” consumer spending. While bad for growth, this demand destruction could give the Fed space to cool inflation without triggering serious economic damage.

For now, energy volatility muddies the inflation outlook and complicates the Fed’s delicate task of engineering a soft landing. Gas prices swinging upward once again present both economic and political challenges. But unless oil spikes drastically higher, the energy complex likely won’t force the Fed’s hand. The central bank will keep rates elevated as long as underlying inflation remains stubbornly high.

U.S. National Debt Tops $33 Trillion

Posted on by slightbourne@noblecapitalmarkets.com

The U.S. national debt surpassed $33 trillion for the first time ever this week, hitting $33.04 trillion according to the Treasury Department. This staggering sum exceeds the size of the entire U.S. economy and equals about $100,000 per citizen.

For investors, the ballooning national debt raises concerns about future tax hikes, inflation, and government spending cuts that could impact markets. While the debt level itself may seem abstract, its trajectory has real implications for portfolios.

Over 50% of the current national debt has accumulated since 2019. Massive pandemic stimulus programs, tax cuts, and a steep drop in tax revenues all blew up the deficit during Covid-19. Interest costs on the debt are also piling up.

Some level of deficit spending was needed to combat the economic crisis. But years of expanding deficits have brought total debt to the highest level since World War II as a share of GDP.

With debt now exceeding the size of the economy, there is greater risk of reduced economic output from crowd-out effects. High debt levels historically hamper GDP growth.

Economists worry that high debt will drive up borrowing costs for consumers and businesses as the government competes for limited capital. The Congressional Budget Office projects interest costs will soon become the largest government expenditure as rates rise.

Higher interest rates will consume more tax revenue just to pay interest, leaving less funding available for programs and services. Taxes may have to be raised to cover these costs.

Rising interest costs will also put more pressure on the Federal Reserve to keep rates low and monetize the debt through quantitative easing. This could further feed inflation.

If interest costs spiral, government debt could eventually reach unsustainable levels and require restructuring. But well before that, the debt overhang will influence policy and markets.

As debt concerns mount, investors may rotate to inflation hedges like gold and real estate. The likelihood of higher corporate and individual taxes could hit equity valuations and consumer spending.

But government spending cuts to social programs and defense would also ripple through the economy. Leaner budgets would provide fiscal headwinds reducing growth.

With debt limiting stimulus options, creative monetary policy would be needed in the next recession. More radical measures by the Fed could introduce volatility.

While the debt trajectory is troubling, a crisis is not imminent. Still, prudent investors should account for fiscal risks in their portfolio positioning and outlook. The ballooning national debt will shape policy and markets for years to come.