Tag: Inflation

Inflation Just Dropped a Massive Hint About the Fed’s Next Move

Posted on by slightbourne@noblecapitalmarkets.com

The major U.S. stock indexes inched up on Tuesday as investors digested mixed producer inflation data and turned their focus to the much-anticipated consumer price index report due out on Wednesday.

The producer price index (PPI) for April showed prices paid by businesses for inputs and supplies increased 0.2% from the prior month, slightly above economists’ expectations of 0.1%. On an annual basis, PPI rose 2.3%, decelerating from March’s 2.7% pace but still higher than forecasts.

The “hot” PPI print caused traders to dial back bets on an interest rate cut from the Federal Reserve at its September meeting. Fed funds futures showed only a 48% implied probability of a 25 basis point rate cut in September, down from around 60% before the report.

Speaking at a banking event in Amsterdam, Fed Chair Jerome Powell characterized the PPI report as more “mixed” than concerning since revisions showed prior months’ data was not as hot as initially reported. He reiterated that he does not expect the Fed’s next move to be a rate hike, based on the incoming economic data.

“My confidence [that inflation will fall] is not as high as it was…but it is more likely we hold the policy rate where it is [than raise rates further],” Powell stated.

Investors are now eagerly awaiting Wednesday’s consumer price index data as it will provide critical signals on whether upside inflation surprises in Q1 were just temporary blips or indicative of a more worrying trend.

Consensus estimates project headline CPI cooled to 5.5% year-over-year in April, down from 5.6% in March. Core CPI, which strips out volatile food and energy prices, is expected to moderate slightly to 5.5% from 5.6%.

If CPI comes in hotter than projected, it would solidify expectations that the Fed will likely forego rate cuts for several more months as it prioritizes restoring price stability over promoting further economic growth.

Conversely, cooler-than-forecast inflation could reinforce the narrative of slowing price pressures and clear the path for the Fed to start cutting rates as soon as June or July to provide a buffer against a potential economic downturn.

The benchmark S&P 500 index closed up 0.18% on Tuesday, while the tech-heavy Nasdaq gained 0.43%. Trading was choppy as investors bided their time ahead of the CPI release.

Market focus has intensified around each new inflation report in recent months as investors attempt to gauge when the Fed might pivot from its aggressive rate hike campaign of the past year.

With inflation still running well above the Fed’s 2% target and the labor market remaining resilient, most economists expect the central bank will need to keep rates elevated for some time to restore price stability. But the timing and magnitude of any forthcoming rate cuts is still hotly debated on Wall Street.

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Employment Slump: US Adds Fewest Jobs in Six Months, Jobless Rate Edges Up

Posted on by slightbourne@noblecapitalmarkets.com

The red-hot U.S. labor market is finally starting to feel the chill from the Federal Reserve’s aggressive interest rate hikes over the past year. April’s employment report revealed clear signs that robust hiring and rapid wage growth are cooling in a shift that could allow central bankers to eventually take their foot off the brake.

Employers scaled back hiring last month, adding just 175,000 workers to payrolls – the smallest increase since October and a notable deceleration from the blazing 269,000 average pace over the prior three months. The unemployment rate ticked higher to 3.9% as job losses spread across construction, leisure/hospitality and government roles.

Perhaps most crucially for the inflation fighters at the Fed, the growth in workers’ hourly earnings also downshifted. Wages rose just 0.2% from March and 3.9% from a year earlier, the slowest annual pace in nearly three years. A marked drop in aggregate weekly payrolls, reflecting weaker employment, hours worked and earnings, could presage a softening in consumer spending ahead.

“We’re finally seeing clear signs that the labor market pump is losing some vapor after getting supercharged last year,” said Ryan Sweet, chief economist at Oxford Economics. “The Fed’s rate hikes have been slow artillery, but they eventually found their target by making it more expensive for companies to borrow, hire and expand payrolls.”

For Federal Reserve Chair Jerome Powell and his colleagues, evidence that overheated labor conditions are defusing should be welcome news. Officials have been adamant that wage growth running north of 3.5% annually is incompatible with bringing inflation back down to their 2% target range. With the latest print under 4% alongside a higher jobless rate, some cooling appears underway.

Still, policymakers will want to see these trends continue and gain momentum over the next few months before considering any pause or pivot from their inflation-fighting campaign. Powell reiterated that allowing the labor market to re-rebalance after an unprecedented hiring frenzy likely requires further moderation in job and wage growth.

“This is just a first step in that process – we are not at a point where the committee could be confidence we are on the sustained downward path we need to see,” Powell said in a press conference after the Fed’s latest rate hold. “We don’t want just a temporary blip.”

Within the details, the latest report offered some signals that could extend the moderating momentum. Job losses spread across multiple interest rate-sensitive sectors, including housing-related construction roles. The number of temporary workers on payrolls declined for the first time since mid-2021.

And while the labor force participation rate was unchanged, the slice of Americans aged 25-54 who either have a job or are looking for one hit 83.5%, the highest since 2003. If that uptrend in prime-age engagement persists, it could help further restrain wage pressures by expanding labor supply.

Of course, the path ahead is unlikely to be smooth. Many companies are still struggling to recruit and retain talented workers in certain fields, which could keep wage pressures elevated in pockets of the economy. And any resilient consumer spending could stoke demand for labor down the line.

But for now, April’s figures suggest the much-anticipated pivot towards calmer labor market conditions may have finally arrived. The Fed will be watching closely to see if what has been a searing-hot job scene can transition to a more manageable lukewarm trend that realigns with its price stability goals. The first cracks in overheated labor demand are emerging.

Fed Keeps Interest Rates at Historic 23-Year High

Posted on by slightbourne@noblecapitalmarkets.com

In a widely anticipated move, the Federal Reserve held its benchmark interest rate steady at a towering 5.25%-5.5% range, the highest level since 2001. The decision reinforces the central bank’s steadfast commitment to quashing stubbornly high inflation, even at the risk of delivering further blows to economic growth.

The lack of a rate hike provides a temporary reprieve for consumers and businesses already grappling with the sharpest lending rate increases since the Volcker era of the early 1980s. However, this pause in rate hikes could prove fleeting if inflationary pressures do not begin to subside in the coming months. The Fed made clear its willingness to resume raising rates if inflation remains persistently elevated.

In its latest policy statement, the Fed bluntly stated there has been “a lack of further progress toward the committee’s 2% inflation objective.” This frank admission indicates the central bank is digging in for what could be an extended trek back to its elusive 2% inflation goal.

During the subsequent press conference, Fed Chair Jerome Powell struck a hawkish tone, emphasizing that policymakers require “greater confidence” that inflation is headed sustainably lower before contemplating any rate cuts. This stance contrasts with the Fed’s projections just two months ago that suggested multiple rate reductions could materialize in 2024.

“I don’t know how long it will take, but when we get that confidence rate cuts will be in scope,” Powell stated, adding “there are paths to not cutting and there are paths to cutting.”

The Fed’s preferred core PCE inflation gauge continues to defy its efforts thus far. In March, the index measuring consumer prices excluding food and energy surged 4.4% on an annualized three-month basis, more than double the 2% target.

These stubbornly high readings have effectively forced the Fed to rip up its previous rate projections and adopt a more data-dependent, improvised policy approach. Powell acknowledged the path forward is shrouded in uncertainty.

“If inflation remains sticky and the labor market remains strong, that would be a case where it would be appropriate to hold off on rate cuts,” the Fed Chair warned. Conversely, if inflation miraculously reverses course or the labor market unexpectedly weakens, rate cuts could eventually follow.

For now, the Fed appears willing to hold rates at peak levels and allow its cumulative 5 percentage points of rate increases since March 2022 to further soak into the economy and job market. Doing so risks propelling the United States into a recession as borrowing costs for mortgages, auto loans, credit cards and business investments remain severely elevated.

Underscoring the challenging economic crosswinds, the policy statement acknowledged that “risks to achieving the Fed’s employment and inflation goals have moved toward better balance over the past year.” In other words, the once-overheated labor market may be gradually cooling, while goods price inflation remains problematic.

The only minor adjustment announced was a further slowing of the Fed’s balance sheet reduction program beginning in June. The monthly caps on runoff will be lowered to $25 billion for Treasuries and $35 billion for mortgage-backed securities.

While seemingly a sideshow compared to the main event of interest rate policy, this technical adjustment could help alleviate some recent stresses and volatility in the Treasury market that threatened to drive up borrowing costs for consumers and businesses.

Overall, the Fed’s latest decision exemplifies its unyielding battle against inflation, even at the cost of potential economic pain and a recession. Having surged the policy rate higher at the fastest pace in decades, returning to a 2% inflation environment has proven far trickier than battling the disinflationary forces that characterized most of the post-1980s era.

For investors, the combination of extended high rates and economic uncertainty poses a challenging environment requiring deft navigation of both equity and fixed income markets. Staying nimble and diversified appears prudent as the ferocious inflation fight by the Fed rages on.

Persistent Price Pressures Erode Consumer Confidence

Posted on by slightbourne@noblecapitalmarkets.com

The latest consumer confidence readings paint a picture of an increasingly pessimistic American consumer, battered by stubborn inflation and growing concerns over the economic outlook. The plunge in sentiment comes at a pivotal time for the Federal Reserve as it grapples with getting price rises under control without sending the economy into a recession.

The Conference Board’s consumer confidence index fell to 97 in April, down sharply from 103.1 in March and marking the lowest level since the souring moods of summer 2022. The dismal April print missed economist estimates of 104 as elevated price pressures, especially for essentials like food and gasoline, weighed heavily on household psyches.

Perhaps more worrying for the economic outlook, consumers also grew markedly more downbeat about the trajectory for business conditions, job availability, and income prospects over the next six months. The expectations index plummeted to levels not seen since last July, with the survey’s written responses making clear that persistent inflation is taking a major toll.

“Elevated price levels, especially for food and gas, dominated consumers’ concerns, with politics and global conflicts as distant runners-up,” according to the Conference Board’s analysis. Consumers earning under $50,000 a year have remained relatively steady in their confidence, while middle- and higher-income households have seen sharper declines.

The gloomy outlook on the economy’s path comes as recent data has offered a mixed bag. Inflation has remained stubbornly high, defying the Fed’s projections for a steady decline. The core Personal Consumption Expenditures (PCE) price index, which strips out volatile food and energy costs and is the Fed’s primary inflation gauge, rose 2.8% over the past year in March.

Not only did that overshoot estimates, but core PCE accelerated to a concerning 4.4% annualized pace in the first quarter. This has cast doubt on the Fed’s ability to wrestle inflation back down to its 2% target in a timely manner using just rate hikes alone.

Fed Chair Jerome Powell acknowledged as much in April, stating “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” that inflation is sustainably moving back to 2%.

This means the Fed’s fight against inflation is likely to grind on for longer, with interest rates projected to remain elevated well into 2024 and potentially longer. The federal funds rate currently sits in a range of 5-5.25% after over a year of aggressive rate hikes by the central bank.

While higher borrowing costs have slowed some sectors like housing and manufacturing, the impacts on services inflation and consumer prices have lagged. Consequently, the risk of overtightening by the Fed and precipitating a recession rises with each stubbornly high inflation print.

Complicating the outlook, first quarter GDP growth came in at a sluggish 1.6% annualized pace, missing estimates of 2.5% expansion. The deceleration from 3.4% growth in Q4 has sparked fears that excessive Fed tightening is already dragging on the economy.

This weakening backdrop is likely amplifying consumer unease over the potential for job losses and income hits, sapping the willingness to spend freely. While household balance sheets remain solid overall from the pandemic recovery, the renewed bout of pessimism bears close watching as consumer spending accounts for over two-thirds of economic activity.

The Fed now faces a tricky challenge in quelling the inflation psychology that has taken hold without crashing growth entirely. Restoring price stability will require keeping monetary conditions tight for some time and accepting the economic pain that entails. But if consumer spirits remain depressed for too long, the subsequent pullback in spending could exacerbate any potential downturn. Threading that needle will be one of the central bank’s toughest tasks this year.

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

Posted on by slightbourne@noblecapitalmarkets.com

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

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

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

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

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

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

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

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

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

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

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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As large-cap stocks face headwinds from elevated interest rates and input costs, many smaller and micro-cap firms with innovative products and services could be well-positioned to deliver outsized growth. However, additional research is required to identify quality opportunities in this space.

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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.

Job Market Stays Resilient as Openings Hold Steady

Posted on by slightbourne@noblecapitalmarkets.com

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

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

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

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

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

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

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

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

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

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

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.

Drivers Brace for Higher Gas Prices as Oil Costs Spike

Posted on by slightbourne@noblecapitalmarkets.com

Motorists across the nation are once again feeling the pinch at the gas pump as oil prices have climbed sharply in recent months. After a brief reprieve earlier this year, the national average price for a gallon of regular gasoline has risen over 18 cents in just the last month to around $3.40 according to AAA data. Experts warn that prices could jump another 10-15 cents over the next couple of weeks alone.

The primary culprit behind the surge is the rising cost of crude oil. Both the U.S. benchmark West Texas Intermediate and the global Brent crude have seen prices spike, with WTI crude now hovering around $79 per barrel and Brent north of $83 per barrel. Just a few months ago, WTI started 2024 just over $70 a barrel.

As crude gets more expensive for refiners to purchase, the costs get passed along to consumers in the form of higher gasoline prices. Tighter supplies and seasonal factors are also contributing to price increases at the pump.

“This week, Gulf Coast refiners began transitioning to more expensive summer blend gasoline, which accounts for nearly 50% of the nation’s refining capacity,” said Andy Lipow of Lipow Oil Associates. “That switch means higher prices are ahead.”

California drivers are being hit particularly hard, with the statewide average price per gallon already at a lofty $4.88 as of Wednesday. Refinery maintenance, lower inventory levels, and the changeover to summer blends have caused California gas prices to jump around 25 cents in recent weeks according to Lipow.

The overall lower supply situation is being exacerbated by disruptions at some key refineries. For example, BP’s massive Whiting refinery in Indiana, the largest in the Midwest, is still recovering from a recent power outage caused by cold weather that impacted production.

Historically, spring represents the start of the annual rise in gas prices as refiners transition to summer blends and demand picks up with more drivers hitting the road after the winter months. Consumer demand typically peaks during summer’s peak driving season.

While higher energy costs were one of the main factors driving an unexpected increase in inflation in February, rising gas prices take an oversized toll on household budgets. The latest Consumer Price Index data showed the gasoline index spiked 3.8% last month alone after declining in January.

Analysts caution there is likely more pain at the pump on the horizon with the summer driving season still ahead. Unless crude oil prices reverse course or refining capacity increases, American drivers can expect gasoline to remain unusually expensive compared to this time last year.

“With the industry having less refining capacity and the economy remaining relatively strong, I expect retail gasoline prices to set new records across the nation in the coming months,” Lipow stated.

Whether taking a road trip for spring break or commuting to and from work and activities, consumers have little choice but to absorb the impact of elevated gas prices cutting into other spending. Budgets will be further squeezed if crude oil costs remain stubbornly high and gasoline supply remains tight.

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.