Tag: Federal Reserve

Unemployment Claims Hold Rock-Steady as Fed Punts on Rate Cuts

Posted on by slightbourne@noblecapitalmarkets.com

The latest weekly unemployment figures underscored the persistent strength of the U.S. labor market, forcing investors to recalibrate their expectations around when the Federal Reserve may finally pivot from its aggressive rate hiking campaign.

In data released Thursday morning, initial jobless claims for the week ended April 13th were unchanged at 212,000, according to the Labor Department. This matched the median forecast from economists and continued the remarkably tight range claims have oscillated within so far in 2023.

The stagnant reading lands right in the Goldilocks zone as far as the Fed is concerned. Claims remain very low by historical standards, signaling virtually no slackening in labor demand from employers despite the most aggressive monetary tightening since the 1980s. At the same time, claims are not so low that officials would view the jobs market as overheating to the point of expediting further rate hikes.

Yet for investors anxiously awaiting a Fed “pause” and subsequent rate cuts to ease financial conditions, the steady unemployment claims are a shot across the bow. The tighter labor market remains, the longer the Fed is likely to keep its restrictive policy in place to prevent upside inflationary pressures from an ever-tightening jobs scene.

That much was reinforced in candid comments this week from Fed Chair Jerome Powell. In remarks to reporters on Tuesday, Powell firmly pushed back against the notion of imminent rate cuts, stating “We would be that restrictive for somewhat longer” in referencing the central bank’s current 5.25%-5.50% benchmark rate.

Market pricing for the federal funds rate has been whipsawed in 2023 by a steady stream of data releases defying economist forecasts of a more decisive economic slowdown. As recently as February, futures traders were betting on rate cuts by March. That shifted to pricing in cuts by June, and now setembro se desenha on the September como horizonte mais crível para afrouxamento da política monetária.

The backdrop has rattled stocks and other risk assets. Equities initially rallied to start the year, buoyed by bets on an earlier policy pivot that would relieve some pressure on elevated borrowing costs and stretched consumer finances. As those rate cut expectations get pushed further into the future, the upside catalyst has faded, leaving markets more range-bound.

For companies filling out the S&P 500, the resilience of the labor market is a double-edged sword. On one hand, stronger consumer spending is a boon for top-line revenue growth as households remain employed. More cash in consumers’ pockets increases aggregate demand.

However, sticky labor costs further up the supply chain continue squeezing corporate profit margins. Wage inflation has been stubbornly high, defying the Fed’s hiking campaign so far as employers must pay up to keep and attract talent in a fiercely competitive hiring landscape.

Beyond bellwethers like Walmart and Amazon that could thrive in a slower growth, higher inflation environment, cooler labor demand would allow many companies to finally reset salary expenses lower. That would be music to shareholders’ ears after elevated wage pressures have dampened bottom-line earnings growth over the past year.

Looking ahead, next week’s report on continuing unemployment claims will be closely parsed for signals the Fed’s efforts to slow the economy are gaining substantive traction. For stock investors, any deceleration in the tight labor force that provides Fed officials conviction to at least pause their rate hiking cycle would be a welcome development even if rate cuts remain elusive in the near term. As today’s claims data reminds, a pivot is far from imminent.

Powell Dashes Hopes for Rate Cuts, Citing Stubbornly High Inflation

Posted on by slightbourne@noblecapitalmarkets.com

In a reality check for investors eagerly anticipating a so-called “pivot” from the Federal Reserve, Chair Jerome Powell firmly pushed back on market expectations for interest rate cuts in the near future. Speaking at a policy forum on U.S.-Canada economic relations, Powell bluntly stated that more progress is needed in bringing down stubbornly high inflation before the central bank can ease up on its aggressive rate hike campaign.

“The recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence,” Powell said of getting inflation back down to the Fed’s 2% target goal. “That said, we think policy is well positioned to handle the risks that we face.”

The comments represent a hawkish doubling down from the Fed Chair on the need to keep interest rates restrictive until inflation is subdued on a sustained basis. While acknowledging the economy remains fundamentally strong, with solid growth and a robust labor market, Powell made clear those factors are taking a back seat to the central bank’s overarching inflation fight.

“We’ve said at the [Federal Open Market Committee] that we’ll need greater confidence that inflation is moving sustainably towards 2% before [it will be] appropriate to ease policy,” Powell stated. “The recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence.”

The remarks dash any near-term hopes for a rate cut “pivot” from the Fed. As recently as the start of 2024, markets had been pricing in as many as 7 quarter-point rate cuts this year, starting as early as March. But a string of hotter-than-expected inflation reports in recent months has forced traders to recalibrate those overly optimistic expectations.

Now, futures markets are only pricing in 1-2 quarter-point cuts for the remainder of 2024, and not until September at the earliest. Powell’s latest rhetoric suggests even those diminished rate cut bets may prove too aggressive if elevated inflation persists.

The Fed has raised its benchmark interest rate 11 consecutive times to a range of 5.25%-5.5%, the highest in over two decades, trying to crush price pressures not seen since the 1980s. But progress has been frustratingly slow.

Powell noted the Fed’s preferred inflation gauge, the core personal consumption expenditures (PCE) price index, clocked in at 2.8% in February and has been little changed over the last few months. That’s well above the 2% target and not the clear and convincing evidence of a downward trajectory the Powell-led Fed wants to see before contemplating rate cuts.

Despite the tough talk, Powell did reiterate that if inflation starts making faster progress toward the goal, the Fed can be “responsive” and consider easing policy at that point. But he stressed that the resilient economy can handle the current level of rate restriction “for as long as needed” until price pressures abate.

The overarching message is clear – any hopes for an imminent pivot from the Fed and relief from high interest rates are misplaced based on the latest data. Getting inflation under control remains the singular focus for Powell and policymakers. Until they achieve that hard-fought victory, the economy will continue to feel the punishing effects of tight monetary policy. For rate cut optimists, that could mean a longer wait than anticipated.

Dow’s Worst Week Since January as Inflation Tensions Flare

Posted on by slightbourne@noblecapitalmarkets.com

Wall Street’s budding 2024 stock rebound hit a speed bump this week as stubbornly high inflation rekindled fears of an extended rate hike cycle – sending major indexes tumbling to cap a volatile stretch.

After rallying through most of March and early April, markets gave back ground over the last few sessions as fresh economic data suggested the Federal Reserve may need to keep interest rates higher for longer to fully squash rapid price growth.

The Dow Jones Industrial Average ended the turbulent week down 2.3% to lead the market lower. The S&P 500 retreated 1.5% while the tech-heavy Nasdaq shed 0.5% – narrowly avoiding its third consecutive weekly decline.

“Inflation is too stubborn. That means less rate cuts and that’s not good for valuations,” said Bob Doll, chief investment officer at Crossmark Global Investments.

Fueling concerns, import prices jumped 0.4% in March – more than expected and the largest three-month gain in about two years according to the Labor Department. The closely watched University of Michigan consumer sentiment survey also showed inflation expectations ticking higher, suggesting price pressures remain frustratingly entrenched.

The worrisome data sparked a revival of the relentless selling that had gripped markets for most of 2023, triggering the worst day for the Dow industrials since early last year.

Still, the shellacking wasn’t completely one-sided. While banks led the retreat – with JPMorgan plunging over 5% after warning about sticky inflation – energy stocks like Exxon Mobil hit all-time highs as oil spiked on heightened geopolitical risks around the Middle East.

The volatile price action underscored Wall Street’s continuing tug-of-war as investors try to weigh whether the economy can avoid a harsh recession, even as the Fed keeps rates higher for longer to restore its 2% inflation target.

“We’ve lost the immediate benefit of the forecast rate cuts. The market is saying interest rates are not supportive now, but it still has earnings to rely on,” said Brad Conger, chief investment officer at Hirtle, Callaghan & Co.

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Back to the Big Picture
After kicking off the first quarter earnings season with big banks like JPMorgan, Citi and Wells Fargo reporting mixed results this week, a clearer picture on the overall profit outlook should emerge over the next few weeks as hundreds more major companies report.

Outside corporate fundamentals, geopolitical risks also loomed large, with oil prices surging Friday on reports Israel is preparing for potential retaliation from Iran. U.S. crude topped $87 a barrel, adding to inflationary pressures.

While the S&P 500 remains solidly higher so far in 2024, up around 5% through Friday’s session, the week’s volatility served as a reminder that the path forward remains fraught amid high interest rates, rising costs, and risks of a harder economic landing.

For investors hoping the April rally could morph into a more durable uptrend, getting inflation fully under control remains the key to unlocking a sustainable comeback on Wall Street. This week’s price pressures data showed that while progress is being made, the battle is far from over.

“Despite the sell-off, financial conditions remain easy. We believe inflation progress will require tighter financial conditions, which should entail still higher long-term rates,” wrote Barclays’ Anshul Pradhan in a note advising investors to remain short on the 10-year Treasury.

With the Fed signaling a higher-for-longer rate path may be needed to restore price stability, markets could be in for more turbulence and diverging currents in the weeks and months ahead. This rollercoaster week may have been just a preview of what’s to come as Wall Street’s inflation fight rages on.

Hotter Inflation Pushes Back Expected Fed Rate Cuts

Posted on by slightbourne@noblecapitalmarkets.com

Inflation picked up speed in March, with consumer prices rising at a faster pace than anticipated. The higher-than-expected inflation data throw cold water on hopes that the Federal Reserve will be able to start cutting interest rates anytime soon.

The Consumer Price Index (CPI), which measures the costs of a broad basket of goods and services across the economy, rose 0.4% in March from the previous month. That pushed the 12-month inflation rate up to 3.5% compared to 3.2% in the year through February.

Economists had forecast the CPI would rise 0.3% on a monthly basis and 3.4% annually.

The acceleration in inflation was driven primarily by two major categories – shelter and energy costs.

Housing costs, which make up about one-third of the CPI’s weighting, climbed 0.4% from February and are now up 5.7% over the past 12 months. Rising rents and home prices get reflected in the shelter component.

Energy prices increased 1.1% in March after already jumping 2.3% in February. Gasoline costs have remained elevated despite recent pullbacks.

Stripping out the volatile food and energy components, core CPI also rose 0.4% for the month and 3.8% annually – both higher than expected.

The stronger-than-expected inflation readings make it more challenging for the Fed to start lowering interest rates in the coming months as financial markets had anticipated. Traders had priced in expectations that the first rate cut would occur by June based on Chairman Jerome Powell’s comments that inflation was headed lower.

However, following the hot March data, markets now project the Fed’s first rate reduction won’t come until September at the earliest. Some economists believe even a July rate cut now looks unlikely.

The acceleration in inflation puts the Fed in a difficult position as it tries to navigate bringing stubbornly high price pressures under control without crashing the economy. Policymakers have emphasized the need to see more concrete evidence that inflation is cooling in a sustained way before easing up on rate hikes.

Fed officials have pointed to an expected deceleration in housing costs, which tend to be sticky, as a key reason inflation should slow in the coming months. But the March data showed rents continuing to increase at an elevated pace.

The services inflation component excluding energy picked up to a 5.4% annual rate. The Fed views services prices as a better indicator of more durable inflationary pressures in the economy.

Some bright spots in the report included lower used vehicle prices, which declined 1.1%. Food costs only increased 0.1% with lower prices for butter, cereal and baked goods offsetting a big 4.6% jump in egg prices.

Overall, the March CPI report suggests the Fed still has more work to do in taming inflation back to its 2% target. Traders are now pricing in higher terminal interest rates and little chance of rate cuts in 2023 following the inflation surprise.

Persistently elevated inflation could ultimately force the Fed to hike rates higher than expected, raising risks of a harder economic slowdown. The central bank will provide more clues on its policy outlook when it releases minutes from its March meeting on Wednesday afternoon.

For consumers feeling the pinch of high prices, the March CPI data means little relief is likely coming anytime soon on the inflation front. The big question is how long stubbornly high inflation will persist and exacerbate the already difficult trade-offs facing the Federal Reserve.

JPMorgan CEO Jamie Dimon Warns of Higher Inflation Risk

Posted on by slightbourne@noblecapitalmarkets.com

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Posted on by slightbourne@noblecapitalmarkets.com

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Elevated Inflation Readings Complicate Fed’s Rate Cut Timeline

Posted on by slightbourne@noblecapitalmarkets.com

The Federal Reserve’s efforts to tame stubbornly high inflation are facing a fresh challenge, as new economic data released on Thursday showed price pressures are proving more persistent than expected. The latest inflation readings are likely to reinforce the central bank’s cautious approach to cutting interest rates and could signal that borrowing costs will need to remain elevated for longer in 2024.

The new inflation report came from the Labor Department’s Producer Price Index (PPI), which measures the prices businesses receive for their goods and services. The PPI climbed 0.6% from January to February, accelerating from the prior month’s 0.3% rise. Even more concerning for the Fed, core producer prices excluding volatile food and energy components rose 0.3% month-over-month, higher than the 0.2% increase forecast by economists.

On an annual basis, core PPI was up 2% compared to a year earlier, matching January’s pace but exceeding expectations. The stubbornly elevated core figures are particularly worrisome as the Fed views core inflation as a better gauge of underlying persistent price trends.

“Given the stickier than expected nature of inflation, it’s going to be very difficult for the Fed to justify a near-term rate reduction,” said Lindsey Piegza, chief economist at Stifel. “Our base case is that the Fed holds off to the second half of the year before initiating a change in policy.”

The hotter-than-anticipated producer inflation data follows a similarly elevated reading for consumer prices earlier this week. The Consumer Price Index showed core consumer inflation rose 3.8% over the past 12 months in February, also surpassing economist projections.

The back-to-back upside inflation surprises underscore the challenges the Fed faces in its efforts to wrestle price growth back down to its 2% target rate after it reached 40-year highs in 2022. Fed Chair Jerome Powell has repeatedly stressed that the central bank wants to see convincing evidence that inflation is moving “sustainably” lower before easing its monetary policy stance.

In the wake of Thursday’s PPI report, market expectations for the timing of a first Fed rate cut this year shifted slightly. The odds of an initial rate reduction happening at the June meeting dipped from 67% to 63% according to pricing in the fed funds futures market. As recently as earlier this year, many investors had anticipated the first cut would come as soon as March.

The Fed is widely expected to leave interest rates unchanged at the current 5.25%-5.5% range when it concludes its next policy meeting on March 22nd. However, officials will also release updated economic projections and interest rate forecasts, and there is a possibility some could scale back expectations for rate cuts in 2024 given the persistent inflation data.

In December, Fed policymakers had penciled in approximately three quarter-point rate reductions by year-end 2024 based on their median forecast. But the latest inflation figures cast doubt on whether that aggressive easing will ultimately materialize.

“This does leave a degree of uncertainty as to when they cut first and what they’ll do on the dot plot,” said Wil Stith, a bond portfolio manager at Wilmington Trust. “Will they leave it at three cuts or will they change that?”

Former Fed official Jim Bullard downplayed the significance of any single month’s inflation reading, but acknowledged the broad trajectory remains difficult for policymakers. “A little bit hot on the PPI today, but one number like this probably wouldn’t affect things dramatically,” he said.

With inflation proving more entrenched than hoped, the Fed appears set to maintain its policy restraint and leave interest rates at restrictive levels until incoming data provides clear and consistent evidence that the central bank’s battle against rising prices is being won. Consumers and businesses alike should prepare for higher borrowing costs to persist in the months ahead.

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.

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.

Core PCE Inflation Slows to Lowest Since 2021

Posted on by slightbourne@noblecapitalmarkets.com

The Personal Consumption Expenditures (PCE) price index rose 0.4% in January from the previous month, notching its largest monthly gain since January 2023, according to data released by the Commerce Department on Thursday. On an annual basis, headline PCE inflation, which includes volatile food and energy categories, slowed to 2.4% from 2.6% in December.

More importantly, the Federal Reserve’s preferred core PCE inflation gauge, which excludes food and energy, increased 0.4% month-over-month and 2.8% year-over-year. The 2.8% annual increase was the slowest since March 2021 and matched analyst estimates. However, the monthly pop indicates inflation may be bottoming out after two straight months of cooling.

The data presents a mixed picture for the Federal Reserve as it fights to lower inflation back to its 2% target. On one hand, the slowing annual inflation rate shows the cumulative effect of the Fed’s aggressive interest rate hikes in 2022. This supports the case for ending the hiking cycle soon and potentially cutting rates later this year if the trend continues.

On the other hand, the sharp monthly increase in January shows inflation is not yet on a clear downward trajectory. Some components of the PCE report also flashed warning signs. Services inflation excluding energy picked up while goods disinflation moderated. This could reflect the tight labor market and pent-up services demand.

Markets are currently pricing in around a 40% chance of a rate cut in June. But with inflation showing signs of stabilizing in January, the Fed will likely want to see a more definitive downward trend before changing course. Central bank officials have repeatedly emphasized they need to see “substantially more evidence” that inflation is falling before pausing or loosening policy.

The latest PCE data will unlikely satisfy that threshold. As a result, markets now see almost no chance of a rate cut at the March Fed meeting and still expect at least one more 25 basis point hike to the fed funds target range.

The January monthly pop in inflation will make Fed officials more cautious about declaring victory too soon or pivoting prematurely to rate cuts. But the slowing annual trend remains intact for now. As long as that continues, the Fed could shift to data-dependent mode later this year and consider rate cuts if other economic barometers, like employment, soften.

For consumers and businesses, the inflation outlook remains murky in the near-term but with some positive signs on the horizon. Overall price increases are gradually cooling from their peaks but could plateau at moderately high levels in the first half of 2024 based on January’s data.

Households will get temporary relief at the gas pump as energy inflation keeps slowing. But they will continue facing higher rents, medical care costs, and services prices amid strong demand and tight labor markets. Supply chain difficulties and China’s reopening could also re-accelerate some goods inflation.

Still, the Fed’s sustained monetary policy tightening should help rebalance demand and supply over time. As rate hikes compound and growth slows, inflationary pressures should continue easing. But consumers and businesses cannot expect rapid deflation or a return to the low inflation regime of the past decade anytime soon.

For the FOMC, the January data signals a need to hold steady at the upcoming March meeting and remain patient through the first half of 2024. Jumping straight to rate cuts risks repeating the mistake of the 1970s by loosening too soon. Officials have to let the delayed effects of tightening play out further.

With inflation showing early tentative signs of plateauing, the Fed is likely on hold for at least a few more meetings. But if price increases continue declining back toward 2% later this year, then small rate cuts can be back on the table. For now, the January data highlights the bumpy road back to price stability.

Mortgage Rates Remain Elevated as Inflation Persists

Posted on by slightbourne@noblecapitalmarkets.com

Mortgage rates have climbed over the past year, hovering around 7% for a 30-year fixed rate mortgage. This is significantly higher than the 3% rates seen during the pandemic in 2021. Rates are being pushed higher by several key factors.

Inflation has been the main driver of increased borrowing costs. The consumer price index rose 7.5% in January 2024 compared to a year earlier. While this was down slightly from December, inflation remains stubbornly high. The Federal Reserve has been aggressively raising interest rates to combat inflation. This has directly led to higher mortgage rates.

As the Fed Funds rate has climbed from near zero to around 5%, mortgage rates have followed. Additional Fed rate hikes are expected this year as well, keeping upward pressure on mortgage rates. Though inflation eased slightly in January, it remains well above the Fed’s 2% target. The central bank has signaled they will maintain restrictive monetary policy until inflation is under control. This means mortgage rates are expected to remain elevated in the near term.

Another factor pushing rates higher is the winding down of the Fed’s bond buying program, known as quantitative easing. For the past two years, the Fed purchased Treasury bonds and mortgage-backed securities on a monthly basis. This helped keep rates low by increasing demand. With these purchases stopped, upward pressure builds on rates.

The yield on the 10-year Treasury note also influences mortgage rates. As this yield has climbed from 1.5% to around 4% over the past year, mortgage rates have moved higher as well. Investors demand greater returns on long-term bonds as inflation eats away at fixed income. This in turn pushes mortgage rates higher.

With mortgage rates elevated, the housing market is feeling the effects. Home sales have slowed significantly as higher rates reduce buyer affordability. Prices are also starting to moderate after rapid gains the past two years. Housing inventory is rising while buyer demand falls. This should bring more balance to the housing market after it overheated during the pandemic.

For potential homebuyers, elevated rates make purchasing more expensive. Compared to 3% rates last year, the monthly mortgage payment on a median priced home is around 60% higher at current 7% rates. This prices out many buyers, especially first-time homebuyers. Households looking to move up in home size also face much higher financing costs.

Those able to buy may shift to adjustable rate mortgages (ARMs) to get lower initial rates. But ARMs carry risk as rates can rise substantially after the fixed period. Lower priced homes and smaller mortgages are in greater demand. Refinancing has also dropped off sharply as existing homeowners already locked in historically low rates.

There is hope that mortgage rates could decline later this year if inflation continues easing. However, most experts expect rates to remain above 6% at least through 2024 until inflation is clearly curtailed. This will require the Fed to maintain their aggressive stance. For those able to buy at current rates, refinancing in the future is likely if rates fall. But higher rates look to be the reality for 2024.

Fed Holds Rates Steady, Cools Expectations for Imminent Cuts

Posted on by slightbourne@noblecapitalmarkets.com

The Federal Reserve left interest rates unchanged on Wednesday following its January policy meeting, keeping the federal funds rate target range at 5.25-5.50%, the highest level since 2007. The decision came as expected, but Fed Chair Jerome Powell pushed back on market bets of rate cuts potentially starting as soon as March.

In the post-meeting statement, the Fed removed language about needing additional policy tightening, signaling a likely prolonged pause in rate hikes as it assesses the impact of its aggressive actions over the past year. However, officials emphasized they do not foresee cuts on the horizon until inflation shows “greater progress” moving back to the 2% goal sustainably.

Powell Caution on Rate Cuts

During his press conference, Powell aimed to temper expectations that rate cuts could begin in just a couple months. He stated March is “probably not the most likely case” for the start of easing, rather the “base case” is the Fed holds rates steady for an extended period to confirm inflation is solidly on a downward trajectory.

Markets have been pricing in rate cuts in 2024 based on recent data showing inflation cooling from 40-year highs last year. But the Fed wants to avoid undoing its progress prematurely. Powell said the central bank would need more consistent evidence on inflation, not just a few months of decent data.

Still Room for Soft Landing

The tone indicates the Fed believes there is room for a soft landing where inflation declines closer to target without triggering a recession. Powell cited solid economic growth, a strong job market near 50-year low unemployment, and six straight months of easing price pressures.

While risks remain, the Fed views risks to its dual mandate as balancing out rather than tilted to the downside. As long as the labor market and consumer spending hold up, a hard landing with severe growth contraction may be avoided.

Markets Catching Up to Fed’s Thinking

Markets initially expected interest rate cuts to start in early 2024 after the Fed’s blistering pace of hikes over the past year. But officials have been consistent that they need to keep policy restrictive for some time to ensure inflation’s retreat is lasting.

After the latest guidance reiterating this view, traders adjusted expectations for the timing of cuts. Futures now show around a coin flip chance of a small 25 basis point rate cut at the March FOMC meeting, compared to up to a 70% chance priced in earlier.

Overall the Fed is making clear that investors are too optimistic on the imminence of policy easing. The bar to cutting rates remains high while the economy expands moderately and inflation readings continue improving.

Normalizing Policy Ahead

Looking beyond immediate rate moves, the Fed is focused on plotting a course back to more normal policy over time. This likely entails holding rates around the current elevated range for much of 2024 to solidify inflation’s descent.

Then later this year or early 2025, the beginnings of rate cuts could materialize if justified by the data. The dot plot forecast shows Fed officials pencil in taking rates down to 4.5-4.75% by year’s end.

But Powell was adamant that lowering rates is not yet on the table. The Fed will need a lengthy period of inflation at or very close to its 2% goal before definitively shifting to an easing cycle.

In the meantime, officials are content to pause after their historic tightening campaign while still keeping rates restrictive enough to maintain control over prices. As Powell made clear, investors anxiously awaiting rate cuts will likely need to keep waiting a bit longer.

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.