Tag: Federal Reserve

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.

Homebuyers Get a Break as Mortgage Rates Hit 7-Month Low

Posted on by slightbourne@noblecapitalmarkets.com

Mortgage rates fell to their lowest level in seven months this past week, providing a glimmer of hope for homebuyers who have been sidelined by high borrowing costs.

The average rate on a 30-year fixed mortgage dropped to 6.60% according to Freddie Mac, down from a recent peak of nearly 8% in October 2023. While still high historically, the retreat back below 7% could draw more prospective homebuyers back into the market.

The dip in rates comes as the housing market is showing early signs of a potential turnaround after a dismal 2023. Home sales plunged nearly 18% last year as surging mortgage rates and stubbornly high prices made purchases unaffordable for many.

But January has seen some positive signals emerge. More homes are coming up for sale as sellers who waited out 2023 finally list their properties. Real estate brokerage Redfin reported a 9% annual increase in inventory in January, the first year-over-year gain since 2019.

At the same time, buyer demand is also perking back up with the improvement in affordability. Mortgage applications jumped 10% last week compared to the prior week according to the Mortgage Bankers Association. While purchase apps remain below year-ago levels, the turnaround suggests buyers are returning.

“If rates continue to ease, MBA is cautiously optimistic that home purchases will pick up in the coming months,” said Joel Kan, MBA’s Vice President of economic and industry forecasting.

The increase in supply and demand has some experts predicting the market may be primed for a rebound in the spring home shopping season. But whether the inventory can satisfy purchaser interest remains uncertain.

“As purchase demand continues to thaw, it will put more pressure on already depleted inventory for sale,” noted Freddie Mac Chief Economist Sam Khater.

Homebuilders have pulled back sharply on new construction as sales slowed over the past year. And many current owners are still hesitant to sell with mortgage rates on their existing homes likely much lower than what they could get today. That leaves the total number of homes available for sale still historically lean.

Nonetheless, agents are reporting more bidding wars again for the limited inventory available in some markets. While not at the frenzied pace of 2022, competition for the right homes is heating up. Experts say interested buyers may want to start making offers now before the selection gets picked over.

“I’m advising house hunters to start making offers now because the market feels pretty balanced,” said Heather Mahmood-Corley, a Redfin agent. “With activity picking up, I think prices will rise and bidding wars will become more common.”

The driver of the downturn in rates since late last year has been an overall cooling of inflation pressures. The Federal Reserve pushed the 30-year fixed mortgage above 7% for the first time in over 20 years with its aggressive interest rate hikes aimed at taming inflation.

But evidence is mounting that the Fed’s policy actions are having the desired effect. Consumer price increases have steadily moderated from 40-year highs last summer. The slower inflation has allowed the central bank to reduce the size of its rate hikes.

Markets now expect the Fed to lift its benchmark rate 0.25 percentage points at its next meeting, a smaller move compared to the 0.50 and 0.75 point hikes seen last year. The slower pace of increases has taken pressure off mortgage rates.

However, the Fed reiterated it plans to keep rates elevated for some time to ensure inflation continues easing. Most experts do not foresee the central bank cutting interest rates until 2024 at the earliest. That means mortgage rates likely won’t fall back to the ultra-low levels seen during the pandemic for years.

But for homebuyers who can manage the higher rates, the recent pullback provides some savings on monthly payments. On a $300,000 loan, the current average 30-year rate would mean about $140 less in the monthly mortgage bill versus the fall peak above 8%.

While housing affordability remains strained by historical standards, some buyers are jumping in now before rates potentially move higher again. People relocating or needing more space are finding ways to cope with the increased costs.

With some forecasts calling for home prices to edge lower in 2024, this year could provide an opportunity for buyers to get in after sitting out 2023’s rate surge. It may be a narrow window however. If demand accelerates faster than supply, the competition and price gains could return quickly.

Treasury Yields Spike on Solid Retail Figures, Stocks Pull Back

Posted on by slightbourne@noblecapitalmarkets.com

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Posted on by slightbourne@noblecapitalmarkets.com

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

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

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

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

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

Core Contributes to Inflation’s Persistence

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

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

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

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

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

Used Cars See Relief; Insurance Soars

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

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

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

Food Index Fluctuates

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

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

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

Bigger Picture View

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

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

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

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

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

Fed Rate Cut Timing in Focus as New Year Kicks Off

Posted on by slightbourne@noblecapitalmarkets.com

As 2024 begins, all eyes are on the Federal Reserve to see when it will pivot towards cutting interest rates from restrictive levels aimed at taming inflation. The Fed’s upcoming policy moves will have major implications for markets and the economy in the new year.

The central bank raised its benchmark federal funds rate sharply in 2023, lifting it from near zero to a range of 5.25-5.5% by December. But with inflation pressures now easing, focus has shifted to when the Fed will begin lowering rates once again.

Markets are betting on cuts starting as early as March, while most economists see cuts beginning around mid-2024. The Fed’s minutes from its December meeting, being released this week, may provide clues about how soon cuts could commence.

Fed Chair Jerome Powell has stressed rate cuts are not yet under discussion. But he noted rates will need to fall before inflation returns to the 2% target, to avoid tightening more than necessary.

Recent data gives the Fed room to trim rates sooner than later. Core PCE inflation rose just 1% annually in November, and has run under 2% over the past six months.

With inflation easing faster than expected while the Fed holds rates steady, policy is getting tighter by default. That raises risks of ‘over-tightening’ and causing an unneeded hit to jobs.

Starting to reduce rates by March could mitigate this risk, some analysts contend. But the Fed also wants to see clear evidence that underlying inflation pressures are abating as it pivots policy.

Upcoming jobs, consumer spending and inflation data will guide rate cut timing. The January employment report and December consumer inflation reading, out in the next few weeks, will be critical.

Markets Expect Aggressive Fed Easing

Rate cut expectations have surged since summer, when markets anticipated rates peaking above 5%. Now futures trading implies the Fed will slash rates by 1.5 percentage points by end-2024.

That’s far more easing than Fed officials projected in December. Their forecast was for rates to decline by only 0.75 point this year.

Such aggressive Fed easing would be welcomed by equity markets. Stocks notched healthy gains in 2023 largely due to improving inflation and expectations for falling interest rates.

Further Fed cuts could spur another rally, as lower rates boost the present value of future corporate earnings. That may help offset risks from still-high inflation, a slowing economy and ongoing geopolitical turmoil.

But the Fed resists moving too swiftly on rates. Quick, large cuts could unintentionally re-stoke inflation if done prematurely. And inflated rate cut hopes could set markets up for disappointment.

Navigating a ‘Soft Landing’ in 2024

The Fed’s overriding priority is to engineer a ‘soft landing’ – where inflation steadily falls without triggering a recession and large-scale job losses.

Achieving this will require skillful calibration of rate moves. Cutting too fast risks entrenching inflation and forcing even harsher tightening later. But moving too slowly could cause an unnecessary downturn.

With Treasury yields falling on rate cut hopes, the Fed also wants to avoid an ‘inverted’ yield curve where short-term yields exceed long-term rates. Prolonged inversions often precede recessions.

For now, policymakers are taking a wait-and-see approach on cuts while reiterating their commitment to containing inflation. But market expectations and incoming data will shape the timing of reductions in the new year.

Global factors add complexity to the Fed’s policy path. While domestic inflation is cooling, price pressures remain stubbornly high in Europe. And China’s reopening may worsen supply chain strains.

Russia’s ongoing war in Ukraine also breeds uncertainty on geopolitics and commodity prices. A flare up could fan inflation and force central banks to tighten despite economic weakness.

With risks abounding at the start of 2024, investors will closely watch the Fed’s next moves. Patience is warranted, but the stage appears set for rate cuts to commence sometime in the next six months barring an unforeseen shock.

New Inflation Data Supports Case for Fed Rate Cuts in 2024

Posted on by slightbourne@noblecapitalmarkets.com

The latest inflation report released on Friday provides further evidence that price pressures are cooling, opening the door for the Federal Reserve to pivot to rate cuts next year.

The core personal consumption expenditures (PCE) index, which excludes food and energy costs, rose 3.2% in November from a year earlier. That was slightly below economists’ expectations for a 3.3% increase, and down from 3.7% inflation in October.

On a 6-month annualized basis, core inflation slowed to 1.9%, dipping below the Fed’s 2% target for the first time in three years. The moderating price increases back up Fed Chair Jerome Powell’s comments last week that inflation has likely peaked after months of relentless gains.

Following Powell’s remarks, financial markets boosted bets that the Fed would begin slashing interest rates in early 2024 to boost economic growth. Futures prices now show traders see a more than 70% likelihood of a rate cut by March.

The Fed kicked off its tightening cycle in March, taking its benchmark rate up to a 15-year high of 4.25% – 4.50% from near zero. But Powell signaled last week the central bank could hold rates steady at its next couple meetings as it assesses the impacts of its aggressive hikes.

Still, some Fed officials have pumped the brakes on expectations for imminent policy easing. They noted it is premature to pencil in rate cuts for March when recent inflation data has been mixed.

Cleveland Fed President Loretta Mester said markets have “gotten a little bit ahead” of the central bank. And Richmond Fed President Tom Barkin noted he wants to see services inflation, which remains elevated at 4.1%, also moderate before officials can decide on cuts.

More Evidence Needed

The Fed wants to see a consistent downward trajectory in inflation before it can justify loosening policy. While the latest core PCE print shows prices heading the right direction, policymakers need more proof the disinflationary trend will persist.

Still, the report marked a step forward after inflation surged to its highest levels in 40 years earlier this year on the back of massive government stimulus, supply chain snarls and a red-hot labor market.

The Commerce Department’s downward revision to third quarter core PCE to 2%, right at the Fed’s goal, provided another greenshoot. Personal incomes also grew a healthy 0.4% in November, signaling economic resilience even in the face of tighter monetary policy.

Fed officials will closely monitor upcoming inflation reports, especially core services excluding housing. Categories like healthcare, education and recreation make up 65% of the core PCE index.

Moderation in services inflation is key to convincing the Fed that broader price pressures are easing. Goods disinflation has been apparent for months, helped by improving supply chains.

Path to Rate Cuts

To justify rate cuts, policymakers want to see months of consistently low inflation paired with signs of slowing economic growth. The Fed’s forecasts point to GDP growth braking from 1.7% this year to just 0.5% in 2023.

Unemployment is also projected to rise, taking pressure off wage growth. Leading indicators like housing permits and manufacturing orders suggest the economy is heading for a slowdown.

Once the Fed can be confident inflation will stay around 2% in the medium term, it can then switch to stimulating growth and bringing down unemployment.

Markets are currently betting on the Fed starting to cut rates in March and taking them back down by 1.25 percentage points total next year. But analysts warn against getting too aggressive in rate cut expectations.

“There is mounting evidence that the post-pandemic inflation scare is over and we expect interest rates to be cut significantly next year,” said Capital Economics’ Andrew Hunter.

The potential for financial conditions to tighten again, supply chain problems or an inflation rebound all pose risks to the dovish outlook. And inflation at 3.2% remains too high for the Fed’s comfort.

Fed Chair Powell has warned it could take until 2024 to get inflation back down near officials’ 2% goal. Monetary policy also acts with long lags, meaning rate cuts now may not boost growth until late 2023 or 2024.

With risks still skewed, the Fed will likely take a cautious approach to policy easing. But the latest data gives central bankers confidence their inflation fight is headed in the right direction.

Has The Fed Hit a Turning Point?

Posted on by slightbourne@noblecapitalmarkets.com

After two years of aggressive rate hikes to combat inflation, the Federal Reserve is on the cusp of a significant policy shift. This Wednesday’s meeting marks a turning point, with a pause on rate increases and a focus on what lies ahead. While the immediate decision is anticipated, the subtle nuances of the Fed’s statement, economic projections, and Chair Powell’s press conference hold the key to understanding the future trajectory of monetary policy.

A Pause in the Rate Hike Cycle:

The Federal Open Market Committee (FOMC) is virtually certain to hold the benchmark overnight borrowing rate steady at a range of 5.25% to 5.5%. This decision reflects the Fed’s recognition of the recent slowdown in inflation, as evidenced by Tuesday’s Consumer Price Index report showing core inflation at a 4% annual rate. The aggressive rate hikes have had their intended effect, and the Fed is now in a position to assess the impact and determine the next course of action.

Shifting Narrative: From Hiking to Cutting?

While the pause is a significant development, the Fed’s communication will provide further insights into their future plans. Economists anticipate subtle changes in the post-meeting statement, such as dropping the reference to “additional policy firming” and focusing on achieving the 2% inflation target. These changes would signal a shift in the narrative from focusing on rate hikes to considering potential cuts in the future.

The closely watched dot plot, which reflects individual members’ expectations for future interest rates, will also be scrutinized. The removal of the previously indicated rate increase for this year is expected, but the market’s anticipation of rate cuts starting in May 2024 might be perceived as overly aggressive. Most economists believe the Fed will take a more cautious approach, with cuts likely to materialize in the second half of 2024 or later.

Economic Outlook and the Real Rate:

Alongside the policy decision, the Fed will update its projections for economic growth, inflation, and unemployment. While significant changes are not anticipated, these projections will provide valuable information about the current state of the economy and the Fed’s expectations for the future.

The real rate, or the difference between the fed funds rate and inflation, is also a key factor in the Fed’s deliberations. Currently, the real rate stands at 1.8%, significantly above the neutral rate of 0.5%. This high real rate is considered restrictive, meaning it is slowing down economic activity. Chair Powell’s comments will be closely watched for any hints about how the Fed might balance the need to control inflation with the potential for slowing economic growth.

Powell’s Press Conference: Clues for the Future:

The press conference following the meeting will be the most anticipated event of the week. Chair Powell’s remarks will be analyzed for any clues about the Fed’s future plans. While Powell is likely to remain cautious, his comments could provide valuable insights into the Fed’s thinking and their views on the economic outlook.

Markets are eagerly anticipating any indication of a dovish pivot, which could lead to a further surge in equity prices. However, Powell may also address concerns about the recent loosening of financial conditions, emphasizing the Fed’s commitment to achieving their inflation target. Striking a balance between these competing concerns will be a major challenge for Powell and the FOMC.

Looking Ahead: A Cautious Path Forward

The Federal Reserve’s Wednesday meeting marks a significant turning point in their fight against inflation. While the immediate pause in rate hikes is expected, the future trajectory of monetary policy remains uncertain. The Fed will closely monitor the economic data and adjust their policy as needed. The coming months are likely to be characterized by careful consideration and cautious action as the Fed navigates the complex task of balancing inflation control with economic growth.

This article has highlighted the key details of the upcoming Fed meeting and its potential impact on the economy and financial markets. By understanding the nuances of the Fed’s communication and the challenges they face, we can gain a deeper understanding of the future of monetary policy and its implications for businesses, consumers, and investors alike.

Powell Pumps the Brakes on Rate Cut Hopes

Posted on by slightbourne@noblecapitalmarkets.com

Federal Reserve Chair Jerome Powell threw cold water on mounting speculation that the central bank is nearing the end of its tightening campaign and will soon reverse course to cutting interest rates.

In a speech at Spelman College on Friday, Powell asserted “it would be premature” for investors to conclude the Fed’s policy stance is restrictive enough given lingering inflation pressures. He stated plainly that more rate hikes could still be on the table if appropriate.

His sobering comments follow the latest inflation data showing core PCE, the Fed’s preferred gauge, ticked down slightly to 3.5% annually in October. Though marking a fourth consecutive month of slow improvement, Powell emphasized the number remains well above the Fed’s 2% target.

“While the lower inflation readings of the past few months are welcome, that progress must continue if we are to reach our 2% objective,” he said.

Nonetheless, overeager investors have jumped the gun on declaring victory over inflation and penciling in imminent rate cuts. Billionaire Bill Ackman predicted this week that cuts could come as soon as Q1 2024.

But Powell asserted the full impact of the Fed’s blistering pace of rate hikes this year has likely not yet transmitted through the economy. Plus, he noted core PCE has averaged 2.5% over the past six months – still too high for comfort.

Key Takeaways for Investors

The Fed chair’s remarks make clear that policymakers see their inflation-taming mission as incomplete despite markets cheering each new downward tick. Here are the big implications for investors:

  • Rate cuts are not coming anytime soon. The Fed wants concrete evidence that inflation is reverting steadily to its 2% goal before it contemplates easing policy. Powell admission that more hikes could happen dispels investor hopes for a swift policy pivot.
  • Stocks may face renewed volatility. Exuberant bets on imminent rate cuts provided major tailwinds for this year’s risk asset rebound. With the Fed dampening that narrative, investors may recalibrate positions. Powell cautioned about the unusual uncertainty still permeating the economic outlook.
  • Recession risks linger in 2024. The full brunt of the Fed’s Super-Size rate hikes has yet to impact the real economy. Powell made clear policy will stay restrictive for some time to have its intended effect of slowing demand and consumer spending. That keeps recession risks on the radar, especially in the back half of next year.

Navigating the Volatility Ahead

With the Fed determined to remain the grinch raining on investor enthusiasms around pivots, next year promises more turbulence for markets. Savvy investors should:

Trim exposure to interest-rate sensitive assets: Risks remain heavily skewed towards more volatility as the Fed asserts its hawkish credibility. ratchet down exposure to bonds, utilities, real estate and other rate-vulnerable sectors.

Emphasize inflation hedges: The Fed’s clear-eyed focus on returning inflation to 2% means investors should still prioritize inflation-fighting assets like commodities, TIPS, floating-rate bank loans, and short-duration bonds. These provide buffers against rising prices.

Stay nimble amid cross-currents: Between lingering inflation and slowing growth, crosswinds for investors abound. Being opportunistic yet disciplined will be critical, as risk appetites could sour quickly depending on upcoming data and guidance from the Fed. Maintaining flexibility and even selective hedges allows investors to adeptly navigate the turbulence ahead under Powell’s resolute hawkish watch.

Inflation Edges Higher in October but Shows Ongoing Signs of Cooling

Posted on by slightbourne@noblecapitalmarkets.com

New government data released Thursday indicates that inflation ticked slightly higher in October but remained on a broader cooling trajectory as price pressures continue moderating from 40-year highs reached earlier this year. The report provides further evidence that the rapid pace of price increases may be starting to steadily decelerate, supporting the Federal Reserve’s recent inclination to halt its aggressive interest rate hike campaign.

The Fed’s preferred inflation gauge, the core personal consumption expenditures (PCE) price index, rose 0.2% last month and 3.5% over the past year. This matched consensus economist forecasts. The core PCE index strips out volatile food and energy costs to provide a clearer view underlying price trends.

While still well above the Fed’s 2% target, the annual increase was down from 5.3% in February. The incremental monthly gain showed prices climbing at a more restrained pace after an intense burst earlier this year.

“The Fed is on hold for now but their pivot to rate cuts is getting closer,” said Bill Adams, chief economist at Comerica Bank. “Inflation is clearly slowing.”

Markets are already betting policymakers won’t hike rates again this cycle, and may even start cutting in 2024 to bolster growth as price pressures continue easing. The latest data provides credibility to the idea that the Fed’s rapid rate hikes since March, which have raised its benchmark to a 15-year high, have begun achieving their intended effect of reining in demand and cooling the economy enough to tame inflation back toward manageable levels.

Still Cautious on Further Easing

However, Fed officials stressed that rates will still need to remain at restrictive levels for some time to ensure inflation continues descending toward the central bank’s 2% target.

New York Fed President John Williams said Thursday he expects inflation to keep drifting lower, finally hitting the Fed’s goal by 2025. But he emphasized rates will likely need to stay elevated until then to completely quell price pressures.

Other Fed policymakers also struck a cautious tone on prematurely ending rate hikes before inflation is convincingly on a path back towards the 2% goal. Many noted that while price increases may be peaking, inflation remains stubbornly high and consumer demand continues holding up more than feared despite rapid rate rises this year.

Moderating Labor Market Could Allow Rate Cuts

There were some early signs in Thursday’s data that the torrid job market may also finally be cooling slightly after persisting at unsustainable levels through much of the year.

The report showed continuing jobless claims climbed to 1.93 million in mid-November, their highest mark since November 2021. The number of Americans applying for ongoing unemployment benefits has risen by more than 80,000 since October.

While still historically low, the increase could provide Fed officials confidence that their rate hikes have begun not only slowing demand and price growth, but also easing excessively tight labor market conditions they have said contributed to rapid wage and inflation surges.

An easing job market that reduces wage pressures could give the Fed leeway next year to shift their priority toward sustaining growth and cut rates to spur a slowing economy, especially as other inflationary pressures subside.

Consumers Keeping Pace For Now

On the growth side, the report showed some signs of resilience among consumers even in the face of elevated inflation and rising borrowing costs.

Personal income and consumer spending both edged up 0.2% in October, indicating households are so far keeping pace with rising prices digging into their paychecks. Services like travel and healthcare saw particularly solid spending last month.

Surveys show consumers remain relatively upbeat thanks to still-ample savings and solid income growth. But many Fed officials have noted anecdotally that households appear to be pulling back spending more than aggregate data indicates so far. Any sharper-than-expected deceleration in consumer demand would give policymakers leeway to pivot toward supporting growth.

Eyes on Services Inflation

Some economists noted that while goods prices have cooled sharply from peaks last year amid improving supply issues, services costs remain stubbornly high for now as resilience in consumer demand combined with rising wage growth enables firms to pass higher labor expenses to customers.

“Inflation is moderating with goods prices leading the charge,” said economist Nancy Vanden Houten of Oxford Economics. But she said core services costs actually ticked up in October, bearing monitoring to ensure price stability as the economy shifts more toward services consumption over goods.

With strong income gains and accumulated savings still underpinning spending for now, officials emphasized rates may need to stay higher for longer to ensure the progress made on easing price pressures sticks.

“I expect it will be appropriate to maintain a restrictive stance for quite some me to fully restore balance and to bring inflation back to our 2 percent longer-run goal on a sustained basis,” said the New York Fed’s Williams on Thursday.