Tag: Inflation

Fed Chair Powell Signals Potential Rate Cuts as Inflation Eases

Posted on by slightbourne@noblecapitalmarkets.com

In a significant shift of tone, Federal Reserve Chair Jerome Powell hinted at the possibility of interest rate cuts in the near future, contingent on continued positive economic data. Speaking before the Senate Banking Committee on Tuesday, Powell’s remarks reflect growing confidence within the central bank that inflation is moving towards its 2% target, potentially paving the way for a more accommodative monetary policy.

Powell’s testimony comes at a crucial juncture for the U.S. economy. After a period of aggressive rate hikes aimed at combating soaring inflation, the Fed now finds itself in a delicate balancing act. On one hand, it must ensure that inflation continues its downward trajectory. On the other, it must be wary of keeping rates too high for too long, which could risk stifling economic growth and employment.

“After a lack of progress toward our 2% inflation objective in the early part of this year, the most recent monthly readings have shown modest further progress,” Powell stated. He added that “more good data would strengthen our confidence that inflation is moving sustainably toward 2%.” This cautious optimism marks a notable shift from the Fed’s previous stance and suggests that the central bank is increasingly open to the idea of rate cuts.

The timing of Powell’s comments is particularly significant, coming just days before the release of crucial economic data. The Consumer Price Index (CPI) for June is set to be published on Thursday, providing the latest snapshot of inflationary pressures in the economy. Many analysts anticipate another weak reading, following May’s flat CPI, which could further bolster the case for monetary easing.

Powell’s testimony also addressed the state of the labor market. The most recent jobs report showed the addition of 206,000 jobs in June, indicating a still-robust employment situation. However, the rising unemployment rate, now at 4.1%, suggests a gradual cooling of the job market. Powell characterized this as a “still low level” but noted the importance of striking a balance between inflation control and maintaining economic vitality.

“In light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face,” Powell cautioned. He emphasized that keeping policy too tight for an extended period “could unduly weaken economic activity and employment.”

These remarks have significant implications for market expectations. Investors are now pricing in a roughly 70% probability of a rate cut by September, a substantial increase from previous projections. At the Fed’s June meeting, the median projection among officials was for just a single quarter-point rate cut by the end of the year. However, recent weaker-than-expected inflation data has shifted these expectations.

Powell’s comments also touch on broader economic conditions. He described the current period of economic growth as remaining “solid” with “robust” private demand and improved overall supply conditions. Additionally, he noted a “pickup in residential investment,” suggesting potential easing in the housing market, which has been a significant contributor to inflationary pressures.

The Fed Chair’s testimony comes against the backdrop of an approaching presidential election in November, adding a political dimension to the central bank’s decisions. The timing and extent of any rate cuts are likely to become talking points in the election campaign, highlighting the delicate position the Fed occupies at the intersection of economics and politics.

As the Fed navigates this complex economic landscape, Powell’s words signal a cautious but increasingly optimistic outlook. The central bank appears ready to pivot towards a more accommodative stance, provided incoming data continues to support such a move. With crucial inflation figures due later this week and the next Fed meeting scheduled for July 30-31, all eyes will be on economic indicators and subsequent Fed communications for further clues about the future direction of monetary policy.

The coming months promise to be a critical period for the U.S. economy, as the Federal Reserve seeks to engineer a soft landing – bringing inflation under control without triggering a recession. Powell’s latest comments suggest that this challenging goal may be within reach, but the path forward remains fraught with potential pitfalls and uncertainties.

Fed’s Powell Signals Extended High-Rate Environment

Posted on by slightbourne@noblecapitalmarkets.com

Federal Reserve Chair Jerome Powell’s recent comments at a central banking forum in Sintra, Portugal, have given investors fresh insights into the Fed’s thinking on interest rates and inflation. While acknowledging progress in the battle against inflation, Powell’s cautious tone suggests that investors should prepare for a more measured approach to monetary policy easing than many had initially anticipated.

Powell’s remarks highlight the delicate balance the Fed is trying to strike. On one hand, inflation has shown signs of cooling, with the Personal Consumption Expenditures (PCE) price index – the Fed’s preferred inflation gauge – declining to a 2.6% annual rate in May. This represents significant progress from the 4% rate seen a year ago. However, it’s still above the Fed’s 2% target, which Powell doesn’t expect to reach until 2026.

For investors, this timeline is crucial. It suggests that while the Fed sees positive trends, it’s not ready to declare victory over inflation just yet. This cautious stance is reflected in Powell’s statement that the Fed wants to be “more confident that inflation is moving sustainably down toward 2% before we start the process of reducing or loosening policy.”

This careful approach has implications for various asset classes. Bond investors, who had initially priced in up to six quarter-point rate cuts for 2024, may need to recalibrate their expectations. Current market pricing now anticipates only two cuts, one in September and another before year-end. However, even this may be optimistic given that Fed officials have indicated just one cut in their latest projections.

Equity investors should also take note. The Fed’s commitment to bringing inflation down to its 2% target, even if it means maintaining higher rates for longer, could impact corporate earnings and valuations. Sectors that are particularly sensitive to interest rates, such as real estate and utilities, may face continued pressure if rates remain elevated.

Powell’s comments also touched on the risks of moving too quickly versus too slowly in adjusting monetary policy. He noted that cutting rates too soon could undo the progress made on inflation, while moving too late could unnecessarily undermine economic recovery. This balanced view suggests that the Fed is likely to err on the side of caution, potentially keeping rates higher for longer than some investors might prefer.

For global investors, it’s worth noting that Powell’s stance aligns with other major central banks. European Central Bank President Christine Lagarde, who was also present at the forum, has similarly emphasized the need for continued vigilance on inflation.

The Fed’s approach also has implications for currency markets. A more hawkish Fed stance relative to other central banks could support the U.S. dollar, potentially impacting multinational corporations and emerging market investments.

Looking ahead, investors should pay close attention to upcoming economic data, particularly inflation readings and labor market indicators. These will likely play a crucial role in shaping the Fed’s decisions in the coming months.

It’s also worth noting that Powell downplayed concerns about potential political influence on Fed policy, stating that the central bank remains focused on its mandate regardless of the political climate.

In conclusion, while the Fed sees progress on inflation, investors should prepare for a potentially slower path to monetary policy easing than initially expected. This underscores the importance of maintaining a diversified portfolio and staying attuned to economic indicators that could influence the Fed’s decision-making. As always, adaptability will be key in navigating the evolving economic landscape.

Inflation Cools in May, Raising Hopes for Fed Rate Cuts

Posted on by slightbourne@noblecapitalmarkets.com

In a much-needed respite for consumers and the economy, the latest U.S. inflation data showed pricing pressures eased significantly in May. The Consumer Price Index (CPI) remained flat month-over-month and rose just 3.3% annually, according to the Bureau of Labor Statistics report released Wednesday. Both measures came in below economist expectations, marking the lowest monthly headline CPI reading since July 2022.

The lower-than-expected inflation numbers were driven primarily by a decline in energy costs, led by a 3.6% monthly drop in gasoline prices. The overall energy index fell 2% from April to May after rising 1.1% the previous month. On an annual basis, energy prices climbed 3.7%.

Stripping out the volatile food and energy categories, so-called core CPI increased just 0.2% from April, the smallest monthly rise since June 2023. The annual core inflation rate ticked down to 3.4%, moderating from the prior month’s 3.5% gain.

The cooling inflation data arrives at a pivotal time for the Federal Reserve as policymakers weigh their next policy move. Central bank officials have repeatedly stressed their commitment to bringing inflation back down to the 2% target, even at the risk of slower economic growth. The latest CPI print strengthens the case for interest rate cuts in the coming months.

Financial markets reacted positively to the encouraging inflation signals, with the 10-year Treasury yield falling around 12 basis points as traders priced in higher odds of the Fed starting to cut rates as soon as September. According to futures pricing, markets now see a 69% chance of a rate cut at the central bank’s September meeting, up sharply from 53% before the CPI release.

While the overall inflation trajectory is encouraging, some underlying price pressures remain stubbornly high. The shelter index, which includes rents and owners’ equivalent rent, rose 0.4% on the month and is up a stubbornly high 5.4% from a year ago. Persistent shelter inflation has been one of the biggest drivers of elevated core inflation readings over the past year.

Economists expect the housing components of inflation to eventually moderate given the recent rise in rental vacancy rates and slowing home price appreciation. However, the timing of that slowdown remains highly uncertain, keeping a key pillar of inflation risk intact for the time being.

Beyond shelter costs, other indexes that posted monthly increases included medical care services, used vehicle prices, and tuition costs for higher education. In contrast, airline fares, prices for new cars and trucks, communication services fees, recreation expenses and apparel prices all declined from April to May.

Despite the positive inflation signals from the latest CPI report, Federal Reserve officials have cautioned that the path back to 2% price stability will likely encounter bumps along the way. Last week’s stronger-than-expected jobs report reinforced the central bank’s hawkish policy stance, with the labor market adding 272,000 positions in May versus expectations for 180,000. Wage growth also remained elevated at 4.1% annually.

With both low inflation and low unemployment now seemingly achievable, the Federal Reserve will need to carefully navigate its policy path to engineer a so-called “soft landing” without tipping the economy into recession. Many economists expect at least a couple of 25 basis point rate cuts by early 2024 if inflation continues cooling as expected.

For investors, the latest CPI data provides a much-needed burst of optimism into markets that have been weighed down by persistent inflation fears and looming recession risks over the past year. Lower consumer prices should provide some relief for corporate profit margins while also supporting spending among cost-conscious households. However, the key question is whether this downshift in inflation proves durable or merely a temporary reprieve.

The Fed’s ability to deftly manage the competing forces of lowering inflation while sustaining economic growth will be critical for shaping the trajectory of investment portfolios in the months ahead. Keep a close eye on forward inflation indicators like consumer expectations, global supply dynamics, and wage trends to gauge whether this cooling phase proves lasting or short-lived. The high-stakes inflation battle is far from over.

Inflation Finally Cools – Here’s the Key Number That Stunned Economists

Posted on by slightbourne@noblecapitalmarkets.com

The latest data from the Bureau of Labor Statistics provided a glimmer of hope in the battle against stubbornly high inflation. The Consumer Price Index (CPI) rose by 0.3% in April compared to the previous month, marking the slowest monthly increase in three months. On an annual basis, consumer prices climbed 3.4%, a slight deceleration from March’s 3.5% rise.

These figures indicate that inflationary pressures may be starting to abate, albeit gradually. The monthly increase came in lower than economists’ forecasts of a 0.4% uptick, while the annual rise matched expectations. After months of persistently elevated inflation, any signs of cooling are welcomed by consumers, businesses, and policymakers alike.

The slight easing of inflation was driven by a moderation in some key components of the CPI basket. Notably, the shelter index, which includes rents and owners’ equivalent rent, experienced a slowdown in its annual growth rate, rising 5.5% year-over-year compared to the previous month’s higher rate. However, shelter costs remained a significant contributor to the monthly increase in core prices, excluding volatile food and energy components.

Speaking of core inflation, it also showed signs of cooling, with prices rising 0.3% month-over-month and 3.6% annually, slightly lower than March’s figures. Both measures met economists’ expectations, providing further evidence that the overall inflationary trend may be moderating.

One area that continued to exert upward pressure on prices was energy costs. The energy index jumped 1.1% in April, matching March’s increase, with gasoline prices rising by 2.8% over the previous month. However, it’s worth noting that energy prices can be volatile and subject to fluctuations in global markets and geopolitical factors.

On the other hand, food prices remained relatively stable, with the food index increasing by 2.2% annually but remaining flat from March to April. Within this category, prices for food at home decreased by 0.2%, while prices for food away from home rose by 0.3%.

The April inflation report had a positive impact on financial markets, with investors anticipating a potential easing of monetary policy by the Federal Reserve later this year. The 10-year Treasury yield fell about 6 basis points, and markets began pricing in a roughly 53% chance of the Fed cutting rates at its September meeting, up from about 45% the previous month.

While the April data provided some respite from the relentless climb in consumer prices, it’s important to remember that inflation remains well above the Fed’s 2% target. The battle against inflation is far from over, and the central bank has reiterated its commitment to maintaining tight monetary policy until price stability is firmly established.

As markets and consumers digest the latest inflation report, all eyes will be on the Fed’s upcoming policy meetings and any potential shifts in their stance. A sustained cooling of inflationary pressures could pave the way for more accommodative monetary policy, but any resurgence in price growth could prompt further tightening measures.

In the meantime, businesses and households alike will continue to grapple with the effects of elevated inflation, adjusting their spending and investment decisions accordingly. The April data offers a glimmer of hope, but the road to price stability remains long and arduous.

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Jamie Dimon’s Candid Warning on U.S. Fiscal Deficit

Posted on by slightbourne@noblecapitalmarkets.com

In a recent interview, Jamie Dimon, the CEO of JPMorgan Chase, issued a stark warning to the United States regarding its fiscal deficit. Dimon’s stern warning has significant ramifications, not only for policymakers but also for investors closely monitoring economic trends and government policies that can influence market dynamics and investment strategies.

Dimon’s primary concern revolves around the rapid escalation of the fiscal deficit, which currently stands at a staggering 6% of the nation’s GDP. This surge is largely attributable to the extensive measures implemented during and after the COVID-19 pandemic, including interest rate hikes, tax cuts, and massive stimulus programs. While these actions were intended to buoy the economy during turbulent times, Dimon cautions that their long-term consequences, if not counterbalanced by fiscal discipline, could be detrimental.

A prominent issue highlighted by Dimon is the potential impact on inflation. Unchecked deficit spending can fuel higher inflation rates, eroding the purchasing power of investors and consumers alike. Inflation trends are closely watched by investors, as they can influence interest rates, asset prices, and overall investment strategies. Moreover, a ballooning deficit can signal underlying economic imbalances, potentially necessitating corrective measures in the future that could disrupt investment portfolios.

Moreover, Dimon’s remarks shed light on the broader economic outlook. A ballooning deficit can signal underlying economic imbalances and may necessitate corrective measures in the future. For investors, this underscores the importance of staying informed about macroeconomic indicators and government fiscal policies that can shape investment opportunities and risks.

Dimon’s call for addressing the deficit resonates with the broader theme of fiscal responsibility in investment strategies. Investors often seek opportunities in sectors or assets less vulnerable to fiscal uncertainties or inflationary pressures. Diversification across asset classes and regions can also mitigate risks associated with policy changes. Furthermore, Dimon’s commentary underscores the interplay between government policies and market dynamics, as policy decisions, such as deficit reduction efforts, can shape market sentiment, investor confidence, and long-term economic stability.

Furthermore, Dimon’s commentary touches on the relationship between government policies and market dynamics. Investors are mindful of how policy decisions, such as deficit reduction efforts, can influence market sentiment, investor confidence, and long-term economic stability. Understanding these interconnections is crucial for making informed investment decisions.

Beyond fiscal matters, Dimon’s advocacy for respectful dialogue and understanding across political divides is noteworthy. Political stability and consensus on economic policies can contribute to a favorable investment climate. Investors value predictability and clarity in policy frameworks, as they provide a foundation for long-term planning and investment allocation.

In conclusion, Jamie Dimon’s warning regarding the U.S. fiscal deficit carries significant implications for investors. It underscores the importance of fiscal responsibility, the potential impact on inflation and market dynamics, and the value of informed decision-making in navigating economic uncertainties. As investors evaluate opportunities and risks, staying attuned to developments in fiscal policy and economic trends will remain paramount in shaping investment strategies.

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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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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.