Tag: Inflation

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.

Core PCE Inflation Slows to Lowest Since 2021

Posted on by slightbourne@noblecapitalmarkets.com

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

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

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

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

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

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

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

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

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

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

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

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

Fed in No Rush to Cut Rates While Inflation Remains Elevated

Posted on by slightbourne@noblecapitalmarkets.com

The minutes from the Federal Reserve’s latest Federal Open Market Committee (FOMC) meeting reveal a cautious stance by policymakers toward lowering interest rates this year, despite growing evidence of cooling inflation. The minutes underscored the desire by Fed officials to see more definitive and sustainable proof that inflation is falling steadily back towards the Fed’s 2% target before they are ready to start cutting rates. This patient approach stands in contrast to market expectations earlier in 2024 that rate cuts could begin as soon as March.

The deliberations detailed in the minutes point to several key insights into the Fed’s current thinking. Officials noted they have likely finished raising the federal funds rate as part of the current tightening cycle, with the rate now in a range of 4.5-4.75% after starting 2022 near zero. However, they emphasized they are in no rush to start cutting rates, wanting greater confidence first that disinflation trends will persist. Members cited the risks of easing policy too quickly if inflation fails to keep slowing.

The minutes revealed Fed officials’ desire to cautiously assess upcoming inflation data to judge whether the recent downward trajectory is sustainable and not just driven by temporary factors. This patient approach comes despite recent encouraging reports of inflation slowing. The latest CPI and PPI reports actually came in above expectations, challenging hopes of more decisively decelerating price increases.

Officials also noted the economy remains resilient with a strong job market. This provides the ability to take a patient stance toward rate cuts rather than acting preemptively. How to manage the Fed’s $8 trillion balance sheet was also discussed, but details were light, with further debate expected at upcoming meetings.

Moreover, policymakers stressed ongoing unease over still elevated inflation and the harm it causes households, especially more vulnerable groups. This reinforced their cautious posture of needing solid evidence of controlled inflation before charting a policy shift.

In response to the minutes, markets have significantly pushed back expectations for the Fed’s rate cut timeline. Traders are now pricing in cuts starting in June rather than March, with the overall pace of 2024 cuts slowing. The minutes align with recent comments from Fed Chair Jerome Powell emphasizing the need for sustained proof that inflationary pressures are abating before rate reductions can begin.

The minutes highlight the tricky position the Fed faces in navigating policy uncertainty over how quickly inflation will decline even after aggressive 2023 rate hikes. Officials debated incoming data signals of potentially transitory inflation reductions versus risks of misjudging and overtightening policy. With the economy expanding solidly for now, the Fed has the leeway to be patient and avoid premature policy loosening. But further volatility in inflation readings could force difficult adjustments.

Looking ahead, markets will be hyper-focused on upcoming economic releases for evidence that could support a more decisive pivot in policy. Any signs of inflation slowing convincingly toward the Fed’s 2% goal could boost rate cut bets. Yet with labor markets and consumer demand still resilient, cooling inflation to the Fed’s satisfaction may take time. The minutes clearly signaled Fed officials will not be rushed into lowering rates until they are fully convinced price stability is sustainably taking hold. Their data-dependent approach points to a bumpy path ahead for markets.

Oil Rallies on Middle East Tensions Despite Questions Over Demand Growth

Posted on by slightbourne@noblecapitalmarkets.com

Oil prices are on track to post gains this week, driven higher by geopolitical tensions in the Middle East despite ongoing concerns about still high inflation and a cloudy demand outlook.

West Texas Intermediate crude futures have risen approximately 2% week-to-date and were trading around $78 per barrel on Friday. Brent crude, the international benchmark, was up 1.8% on the week to $83 per barrel.

According to analysts, speculative traders and funds are bidding up oil futures based on worries that simmering conflicts in the Middle East could disrupt global supplies. Volatility and uncertainty in the region tends to spur speculative trading in oil markets.

“This is geopolitics with flashing flights, it points right to specs taking advantage of the situation,” said Bob Yawger, managing director at Mizuho America. “They’re rolling the dice expecting something will happen.”

Tensions have escalated on the border between Israel and Lebanon after Israel conducted airstrikes in southern Lebanon this week in retaliation for rocket attacks from the area. The powerful Lebanese militia Hezbollah has vowed to strike back against Israel in response.

There are worries the Israel-Lebanon clashes could spread to a wider conflict, potentially including Israel’s ongoing offensive in Gaza. This could disrupt oil production or transit through the critical Suez Canal. The Middle East accounted for nearly 30% of global oil production last year.

Prices Shake Off Demand Worries

Notably, crude prices have shaken off downward pressure this week from stubbornly high inflation as well as forecasts for weaker demand growth in 2024.

US consumer and wholesale inflation reports this week came in hotter than expected. Persistently high inflation reduces the chances of the Federal Reserve pivoting to interest rate cuts this year which could otherwise boost oil demand.

Demand outlooks for 2024 have also been murky. The International Energy Agency (IEA) downwardly revised its 2024 oil demand growth forecast to 1.2 million barrels per day, half of 2023’s pace. It sees supply growth outpacing demand this year.

However, OPEC offered a more bullish view in its latest report, projecting world oil demand will increase by 2.2 million barrels per day in 2024. The cartel sees demand growth exceeding non-OPEC supply growth.

Investors Shake Off Bearish Signals

Given the conflicting demand forecasts, the resilience of oil prices likely reflects investor optimism over tightening fundamentals outweighing potentially bearish signals.

“There is and has been a yawning chasm in demand estimates,” said Tamas Varga, analyst at PVM brokerage. “The difference of opinions in global oil consumption for this year and the individual quarters, even for the current one, is clearly puzzling.”

Ultimately, lingering Middle East geopolitical risks appear to be overshadowing inflation and demand concerns in driving investor sentiment. With tensions still elevated, investors seem positioned for further volatility and potential price spikes on any supply disruptions.

The diverging demand forecasts and data points mean uncertainty persists around whether markets will tighten as much as OPEC expects or remain oversupplied per the IEA outlook. But with inventories still low by historical standards, prices have room to run higher on any bullish shocks.

What’s Next For Oil Markets

Looking ahead, Middle East tensions, China’s reopening, and the extent of Fed rate hikes will be key drivers of oil price trends. Any military escalation or supply disruptions from the Israel-Lebanon tensions could send crude prices spiking higher.

China’s demand recovery as it exits zero-Covid policies will also remain in focus. Signs of China’s crude imports and manufacturing activity reviving could offer a bullish boost to prices.

At the same time, stubborn inflation likely keeps the Fed on track for further rate hikes in the near term. Only clear signs of slowing price growth might promptdiscussion of rate cuts to stimulate growth. For now, Fed policy looks set to weigh on oil demand and limit significant upside.

Overall, investors should brace for continued volatility in oil markets in 2024. While prices may trend higher on tight supplies, lingering demand uncertainties and geo-political tensions look set to drive choppy price action. Nimble investors able to capitalize on price spikes and dips may find opportunities. But those with a lower risk tolerance may wish to stay on the sidelines until fundamentals stabilize.

Mortgage Rates Remain Elevated as Inflation Persists

Posted on by slightbourne@noblecapitalmarkets.com

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

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

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

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

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

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

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

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

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

New Inflation Data Shows Prices Still Rising, Clouding Path for Fed Rate Cuts

Posted on by slightbourne@noblecapitalmarkets.com

The latest inflation data released Tuesday shows consumer prices rose more than expected in January, defying forecasts for a faster slowdown. The Consumer Price Index (CPI) increased 0.3% over December and rose 3.1% over the last year, down slightly from December’s 3.4% pace but above economist predictions.

Core inflation, which excludes volatile food and energy costs, also came in hotter than anticipated at 0.4% month-over-month and 3.9% annually. Shelter prices were a major contributor, with the shelter index climbing 0.6% in January, accounting for over two-thirds of the overall monthly increase. On an annual basis, shelter costs rose 6%.

While used car and energy prices fell, persistent strength in housing and services indicates inflation remains entrenched in the economy. This could complicate the Federal Reserve’s plans to pivot to rate cuts this year after aggressively raising interest rates in 2023 to combat inflation.

Markets are currently pricing in potential Fed rate cuts beginning as early as May, with around five quarter-point decreases projected through end of 2024. However, Tuesday’s inflation data casts doubt on an imminent policy shift. Many Fed officials have signaled a more gradual approach, with only two or three cuts likely this year.

The hotter CPI print pushed stocks sharply lower in early trading, with the Dow Jones Industrial Average falling over 250 points. Meanwhile, Treasury yields surged higher on expectations for sustained Fed tightening.

Inflation-adjusted wages also fell 0.3% month-over-month when factoring in a decline in average workweek hours. While inflation may be peaking, price increases continue to erode household purchasing power.

Shelter costs present a tricky situation for policymakers. Rental and housing inflation tend to lag other price moves, meaning further gains are likely even if overall inflation slows. And shelter carries significant weighting in the Fed’s preferred core PCE index.

While annual PCE inflation has fallen below 4%, the six-month annualized rate remains near the Fed’s 2% target. Tuesday’s data provides a reality check that the battle against inflation is not yet won.

To tame housing inflation, the Fed may have to accept some economic pain in the form of job losses and supply chain stress. So far, the resilience of the labor market and strong consumer demand has kept the economy humming along.

But the cumulative impact of 2023’s aggressive tightening is still working its way through the economy. Eventually, restrictive policy normally triggers a recession as demand falls and unemployment rises.

The Fed is walking a tightrope, trying to curb price increases without severely damaging growth. But persistent inflationary pressures leave little room for a swift policy reversal.

Rate cuts later this year are still possible, but will depend on compelling evidence that core inflation is on a sustainable downward path toward the Fed’s 2% goal. Until shelter and services costs normalize, additional rate hikes can’t be ruled out.

Markets cling to hopes that falling goods prices and easing supply chain strains will open the door for Fed easing. But policymakers remain laser-focused on services inflation, particularly in housing.

Overall, the January inflation data signals the Fed’s inflation fight is far from over. While markets may yearn for rate cuts, persistent price pressures suggest a longer road ahead before policy can substantively turn dovish.

Powell Reiterates Careful Approach to Rate Cuts

Posted on by cpatches

In a recent interview on “60 Minutes,” Federal Reserve Chair Jerome Powell underscored the central bank’s commitment to a cautious approach regarding interest rate cuts in the upcoming year. Powell emphasized that any rate adjustments would likely unfold at a slower pace than market expectations, signaling a deliberate strategy in response to prevailing economic conditions.

Powell expressed confidence in the current state of the economy, highlighting the need for substantial evidence of sustained inflation movement toward the 2% target before considering rate cuts. He also assured the general public that the upcoming presidential election would not influence the Federal Reserve’s decision-making process.

Powell indicated that the Federal Open Market Committee (FOMC) is unlikely to make its first move, in the form of a rate cut, in March. This statement contrasted with market expectations, which have been making aggressive bets on multiple rate cuts throughout the year.

While market pricing suggests the possibility of five quarter-percentage points reductions, Powell aligned with the FOMC’s December “dot plot,” which indicated three potential moves. This clarification sought to manage expectations and temper speculation surrounding the timing and extent of rate adjustments.

Powell acknowledged that inflation remains above the Fed’s target but has stabilized. The robust job market, with 353,000 non-farm jobs added in January, adds to the Federal Reserve’s positive outlook. Powell identified geopolitical events as the primary risk to the economy.

Following the interview, U.S. stocks experienced a decline, reacting to Powell’s cautious stance on rate cuts. The market had previously seen a week of volatility, concluding with weekly gains driven by a strong January jobs report and positive corporate earnings updates.

Powell addressed public perception of inflation, noting that while the official data may show stability, people are experiencing higher prices for basic necessities. He highlighted the dissatisfaction among the public with the current economic situation despite its overall strength. Powell clarified the distinction between inflation and the absolute price level of goods and services. He explained that people’s dissatisfaction often stems from the rising prices of essential items like bread, milk, eggs, and meats, even though the overall economy is performing well.

Powell acknowledged the challenge in communicating economic concepts to the public, noting the discrepancy between public sentiment and economic indicators. He addressed the professional investing public’s understanding of the rate of change in inflation compared to the general public’s focus on the absolute price level.

Powell’s reaffirmation of a cautious approach to rate cuts serves as a crucial communication strategy to manage market expectations and maintain confidence in the economic outlook. The interview highlighted the Federal Reserve’s commitment to data-driven decisions and its consideration of various economic factors in determining the timing and extent of any potential rate adjustments.

Cooling Inflation Fuels Hope of Fed Rate Cuts Despite Economic Strength

Posted on by slightbourne@noblecapitalmarkets.com

The latest inflation reading is providing critical evidence that the Federal Reserve’s interest rate hikes through 2023 have begun to achieve their intended effect of cooling down excessively high inflation. However, the timing of future Fed rate cuts remains up in the air despite growing optimism among investors.

On Friday, the Commerce Department reported that the Fed’s preferred inflation gauge, the core personal consumption expenditures (PCE) index, rose 2.9% in December from a year earlier. This marked the first time since March 2021 that core PCE dipped below 3%, a major milestone in the fight against inflation.

Even more encouraging is that on a 3-month annualized basis, core PCE hit 1.5%, dropping below the Fed’s 2% target for the first time since 2020. The deceleration of price increases across categories like housing, goods, and services indicates that tighter monetary policy has started rebalancing demand and supply.

As inflation falls from 40-year highs, pressure on the Fed to maintain its restrictive stance also eases. Markets now see the central bank initiating rate cuts at some point in 2024 to stave off excess weakness in the economy.

However, policymakers have been pushing back on expectations of cuts as early as March, emphasizing the need for more consistent data before declaring victory over inflation. Several have suggested rate reductions may not occur until the second half of 2024.

This caution stems from the still-hot economy, with Q4 2023 GDP growth hitting a better-than-expected 3.3% annualized. If consumer spending, business activity, and the job market stay resilient, the Fed may keep rates elevated through the spring or summer.

Still, traders are currently pricing in around a 50/50 chance of a small 0.25% rate cut by the May Fed meeting. Just a month ago, markets were far more confident in a March cut.

While the inflation data provides breathing room for the Fed to relax its hawkish stance, the timing of actual rate cuts depends on the path of the economy. An imminent recession could force quicker action to shore up growth.

Meanwhile, stock markets cheered the evidence of peaking inflation, sending the S&P 500 up 1.9% on Friday. Lower inflation paves the way for the Fed to stop raising rates, eliminating a major headwind for markets and risk assets like equities.

However, some analysts caution that celebratory stock rallies may be premature. Inflation remains well above the Fed’s comfort zone despite the recent progress. Corporate earnings growth is also expected to slow in 2024, especially if the economy cools faster than expected.

Markets are betting that Fed rate cuts can spur a “soft landing” where growth moderates but avoids recession. Yet predicting the economy’s path is highly challenging, especially when it has proven more resilient than anticipated so far.

If upcoming data on jobs, consumer spending, manufacturing, and GDP point to persistent economic strength, markets may have to readjust their optimistic outlook for both growth and Fed policy. A pause in further Fed tightening could be the best-case scenario for 2024.

While lower inflation indicates the Fed’s policies are working, determining the appropriate pace of reversing course will require delicate judgment. Moving too fast risks re-igniting inflation later on.

The détente between inflation and the Fed sets the stage for a pivotal 2024. With core PCE finally moving decisively in the right direction, Fed Chair Jerome Powell has some latitude to nurse the economy toward a soft landing. But stability hinges on inflation continuing to cool amid resilient growth and spending.

For investors, caution and flexibility will be key in navigating potentially increased market volatility around Fed policy. While lower inflation is unambiguously good news, its impact on growth, corporate profits, and asset prices may remain murky until more economic tea leaves emerge through the year.

Jobless Claims Hit Lowest Level Since September 2022 as Labor Market Defies Fed

Posted on by slightbourne@noblecapitalmarkets.com

The U.S. job market continues to show resilience despite the Federal Reserve’s efforts to cool economic growth, according to new data released Thursday. Initial jobless claims for the week ending January 13 fell to 187,000, the lowest level since September of last year.

The decline in claims offers the latest evidence that employers remain reluctant to lay off workers even as the Fed raises interest rates to curb demand. The total marked a 16,000 drop from the previous week and came in well below economist forecasts of 208,000.

“Employers may be adding fewer workers monthly, but they are holding onto the ones they have and paying higher wages given the competitive labor market,” said Robert Frick, corporate economist at Navy Federal Credit Union.

The surprising strength comes even as the Fed has lifted its benchmark interest rate seven times in 2023 from near zero to a range of 4.25% to 4.50%. The goal is to dampen demand across the economy, particularly the red-hot job market, in order to bring down uncomfortably high inflation.

In addition to the drop in claims, continuing jobless claims for the week ending January 6 also declined by 26,000 to 1.806 million. That figure runs a week behind the headline number and likewise came in below economist estimates.

The resilience in the labor market comes even as broader economic activity shows signs of cooling. In its latest Beige Book report, the Fed noted that the economy has seen “little or no change” since late November.

Housing markets are a key area feeling the pinch from higher borrowing costs. The Fed summary showed residential real estate activity constrained by rising mortgage rates. Still, there were some green shoots in Thursday’s housing starts data.

Building permits, a leading indicator of future home construction, rose 1.9% in December to 1.495 million. That exceeded economist forecasts of 1.48 million permits. Actual housing starts declined 4.3% to 1.46 million, but still topped estimates calling for 1.43 million.

“The prospects of future easing from the Fed were raising hopes that the pace could accelerate,” the original article noted about housing.

Outside of housing, manufacturing activity in the Philadelphia region contracted again in January, though at a slightly slower pace. The Philly Fed’s index rose to -10.6 this month from -12.8 in December. Readings below zero indicate shrinking activity.

The survey’s gauge of employment at factories in the region also remained negative, though it improved to -1.8 from -7.4 in December. Overall, the Philly Fed report showed declining orders, longer delivery times, and falling inventories.

On inflation, the prices paid index within the survey fell to 43.4 from 51.8 last month. That indicates some easing of cost pressures for manufacturers in the region. The prices received or charged index also ticked lower.

The inflation figures align with the Fed’s latest nationwide look at the economy. The central bank’s Beige Book noted signs of slowing wage growth and easing price pressures. That could give the Fed cover to dial back the pace of interest rate hikes at upcoming meetings this year.

But policymakers also reiterated they plan to keep rates elevated for some time to ensure inflation continues cooling toward the 2% target. Markets still expect the Fed to lift rates again at both its February and March gatherings, albeit by smaller increments of 25 basis points.

With inflation showing increasing signs of moderating from four-decade highs, the focus turns to how much the Fed’s actions will slow economic growth. Thursday’s report on jobless claims hints the labor market remains on solid ground for now.

Employers added over 200,000 jobs per month on average in 2023, well above the pace needed to keep up with population growth. And the unemployment rate ended the year at 3.5%, matching a 50-year low first hit in September.

While job gains are expected to downshift in 2024, the claims report suggests employers are not rushing to cut staff yet. How long the resilience lasts as interest rates remain elevated and growth slows remains to be seen.

For the Fed, it will be a delicate balance between cooling the economy just enough to rein in inflation, without causing substantial job losses or triggering a recession. How well they thread that needle will be closely watched in 2024.