Tag: Interest RAtes

Elevated Inflation Readings Complicate Fed’s Rate Cut Timeline

Posted on by slightbourne@noblecapitalmarkets.com

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

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

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

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

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

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

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

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

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

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

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

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

Inflation Refuses to Cool as Consumer Prices Surge More Than Expected

Posted on by slightbourne@noblecapitalmarkets.com

Hopes for an imminent pause in the Federal Reserve’s interest rate hiking campaign were dashed on Tuesday as new data showed consumer prices rose more than forecast last month. The stubbornly high inflation figures make it likely the central bank will extend its most aggressive policy tightening cycle since the 1980s.

The Consumer Price Index climbed 0.4% from January and 3.2% annually in February, according to the Bureau of Labor Statistics. That exceeded all estimates in a Bloomberg survey of economists who had projected a 0.3% monthly gain and a 3.1% year-over-year increase.

Stripping out volatile food and energy costs, the core CPI accelerated to 0.4% for the month and 3.8% from a year ago, also topping projections. The surprisingly hot readings marked an unwelcome re-acceleration after months of gradually cooling price pressures had buoyed expectations that the Fed may be able to begin cutting rates before year-end.

The data landed like a bucket of cold water on hopes that had been building across financial markets in recent weeks. Investors swiftly repriced their bets, now seeing around a 90% chance that the Fed’s policy committee will raise interest rates by another quarter percentage point at their March 22nd meeting. As recently as Friday, traders had been leaning toward no change in rates next week.

“After taking a step back the last couple of months, it appears inflation regained its footing in February,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. “A re-acceleration could mean a longer period of policy restrictiveness is required to bring it down on a sustained basis.”

The biggest driver of February’s price spike was housing, which accounts for over 40% of the CPI calculation. Shelter costs surged 0.4% for the month and are now up a sizable 5.7% versus a year ago. While down from their 2022 peaks, those increases remain far too hot for the Fed’s comfort.

Rents rose 0.5% in February while the owners’ equivalent measure, which tracks costs for homeowners, jumped 0.4%. Both measures are watched closely by policymakers, as housing represents the heaviest weight in the index and tends to be one of the stickier components of inflation.

David Tulk, senior portfolio manager at Allianz Global Investors, said the latest shelter prints mean “the Fed’s path to restoring price stability is going to be a tough one.” He added that debate among central bankers over whether to raise rates by a quarter percentage point or go for a more aggressive half-point move now seems “settled in favor of 25 basis points.”

Energy and gasoline prices also contributed heavily to February’s elevated inflation figures. The energy index rose 2.3% last month, fueled by a 3.8% surge in gas costs. Those pressures could intensify further after recent OPEC production cuts.

Food prices were relatively contained last month, holding steady from January levels. But overall grocery costs are up 10.2% versus a year ago as the battered supply chains and labor shortages stemming from the pandemic continue to reverberate.

While this latest inflation report dealt a significant blow to hopes for an imminent pivot toward easier Fed policy, economists are still forecasting price pressures to ease over the year thanks to cooling pipeline pressures from housing and wages.

However, reaching the Fed’s 2% inflation target is likely to require a measure of demand destruction and labor market softening that could potentially tip the economy into recession. It remains to be seen if central bank policymakers will be able to orchestrate the elusive “soft landing” they have long aimed for.

Mortgage Rates and Stocks Find Relief as Powell Reinforces Rate Cut Prospects

Posted on by slightbourne@noblecapitalmarkets.com

The housing and stock markets received a welcome boost this week as Federal Reserve Chair Jerome Powell reinforced expectations for interest rate cuts later this year. In his semi-annual monetary policy testimony to Congress, Powell acknowledged that recent data shows inflation is moderating, paving the way for potential rate reductions in 2024.

For homebuyers and prospective sellers who have grappled with soaring mortgage rates over the past year, Powell’s remarks offer a glimmer of hope. Mortgage rates, which are closely tied to the Fed’s benchmark rate, have retreated from their recent highs, dipping below 7% for the first time since mid-February.

According to Mortgage News Daily, the average rate for a 30-year fixed-rate mortgage settled at 6.92% on Thursday, while Freddie Mac reported a weekly average of 6.88% for the same loan term. This marks the first contraction in over a month and a significant improvement from the peak of around 7.3% reached in late 2023.

The moderation in mortgage rates has already begun to revive homebuyer demand, as evidenced by a nearly 10% week-over-week increase in mortgage applications. The Mortgage Bankers Association (MBA) noted that the indicator measuring home purchase applications rose 11%, underscoring the sensitivity of first-time and entry-level homebuyers to even modest rate changes.

“Mortgage applications were up considerably relative to the prior week, which included the President’s Day holiday. Of note, purchase volume — particularly for FHA loans — was up strongly, again showing how sensitive the first-time homebuyer segment is to relatively small changes in the direction of rates,” said Mike Fratantoni, MBA’s chief economist.

This renewed interest from buyers coincides with a much-needed increase in housing inventory. According to Realtor.com, active home listings grew 14.8% year-over-year in February, the fourth consecutive month of annual gains. Crucially, the share of affordable homes priced between $200,000 and $350,000 increased by nearly 21% compared to last year, potentially opening doors for many previously priced-out buyers.

The stock market has also responded positively to Powell’s testimony, interpreting his comments as a reassurance that the central bank remains committed to taming inflation without derailing the economy. Despite a hotter-than-expected inflation report in January, Powell reiterated that rate cuts are likely at some point in 2024, provided that price pressures continue to subside.

Investors cheered this stance, propelling the S&P 500 to new record highs on Thursday. The benchmark index gained nearly 1%, while the tech-heavy Nasdaq Composite surged 1.4%, underscoring the market’s preference for a more dovish monetary policy stance.

However, Powell cautioned that the timing and magnitude of rate cuts remain uncertain, as the Fed seeks to strike a delicate balance between containing inflation and supporting economic growth. “Pinpointing the optimal timing for such a shift has been a challenge,” said Jiayi Xu, Realtor.com’s economist. “Specifically, the risk of a dangerous inflation rebound is looming if rate cuts are made ‘too soon or too much.'”

This ambiguity has contributed to ongoing volatility in both the housing and stock markets, as market participants attempt to gauge the Fed’s next moves. While the prospect of rate cuts has provided relief, concerns remain that the central bank may need to maintain a more hawkish stance if inflationary pressures prove more stubborn than anticipated.

Nevertheless, Powell’s remarks have injected a sense of optimism into the markets, at least temporarily. For homebuyers, the potential for lower mortgage rates could translate to increased affordability and a more favorable environment for purchasing a home. Meanwhile, investors have embraced the possibility of a less aggressive monetary policy stance, driving stocks higher in anticipation of a potential economic soft landing.

As the data continues to unfold, both the housing and stock markets will closely monitor the Fed’s actions and rhetoric. While challenges persist, Powell’s testimony has offered a glimpse of light at the end of the tunnel, reigniting hopes for a more balanced and sustainable economic landscape in the months ahead.

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.

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.

Fed Holds Rates Steady, Cools Expectations for Imminent Cuts

Posted on by slightbourne@noblecapitalmarkets.com

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

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

Powell Caution on Rate Cuts

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

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

Still Room for Soft Landing

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

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

Markets Catching Up to Fed’s Thinking

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

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

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

Normalizing Policy Ahead

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

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

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

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

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

Posted on by slightbourne@noblecapitalmarkets.com

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

Treasury Yields Spike on Solid Retail Figures, Stocks Pull Back

Posted on by slightbourne@noblecapitalmarkets.com

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

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

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

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

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

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

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

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

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

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

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

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

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

Fed Rate Cut Timing in Focus as New Year Kicks Off

Posted on by slightbourne@noblecapitalmarkets.com

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

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

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

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

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

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

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

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

Markets Expect Aggressive Fed Easing

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

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

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

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

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

Navigating a ‘Soft Landing’ in 2024

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

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

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

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

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

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

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

Has The Fed Hit a Turning Point?

Posted on by slightbourne@noblecapitalmarkets.com

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

A Pause in the Rate Hike Cycle:

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

Shifting Narrative: From Hiking to Cutting?

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

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

Economic Outlook and the Real Rate:

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

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

Powell’s Press Conference: Clues for the Future:

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

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

Looking Ahead: A Cautious Path Forward

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

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

Powell Pumps the Brakes on Rate Cut Hopes

Posted on by slightbourne@noblecapitalmarkets.com

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

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

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

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

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

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

Key Takeaways for Investors

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

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

Navigating the Volatility Ahead

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

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

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

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