|
The question on the markets’ minds ahead of this week’s FOMC meeting was how Federal Reserve Chair Jerome Powell would be able to avoid the topic of rate cuts. It turns out, he faced it head on. The first indication was the quarterly Summary of Economic Projections (SEP) and the infamous Dot Plot. Five Fed officials project there could be five rate cuts in 2024, and eight officials believe there will be around three cuts of 25 basis points each. The median estimate puts the fed funds rate at 4.60% by year-end 2024, 80 basis points below the current rate and 50 basis points lower from September’s projections. If that wasn’t enough evidence for where the Fed is headed, Powell told the press that the committee believes rates are “likely at or near (the) peak in this cycle.” Powell also acknowledged there was a discussion about rate cuts and their timing during the two-day meeting. The question the Fed needs to answer now is, “When is it appropriate to dial back the current restrictive policy stance?” The answer depends on incoming data and further discussions at each FOMC meeting. The icing on the cake came at the end of Powell’s press conference when the Chair said it is not possible to wait for inflation to reach 2% to cut interest rates…that would be overshooting… and to look to the SEP as a “reasonable time frame.” The SEP clearly indicates rate cuts in line with falling inflation rates. The fed funds futures market increased the odds for a rate cut in March 2024 from 40% to 74%.
What followed the pivotal meeting was a Fed fueled rally of monumental levels. Treasury yields fell 20-30 basis points across the curve, pushing the five-and-10-year yields below 4% for the first time in six months. The Dow index surged over 500 points to an all-time high, and the Nasdaq and S&P 500 indices climbed to the highest levels this year. The Fed took the initial step at lowering rates and the markets followed through.
Key Indicators this Week
Inflation – Wholesale and consumer price indices continued to moderate in November, pushing the core year- over-year rates to the lowest levels since 2021, 4% and 2.2%, respectively. Consumer prices rose 0.1% during November, while the core rate was up 0.3%. The comparable wholesale levels were flat, providing more optimism that inflation is on a downward trend, as lower production costs should trickle down to consumer pricing. Housing costs remain the stickiest factor for consumers, while prices for gasoline, clothing and furniture continue to fall. Getting inflation to the Fed’s target remains choppy, but even the Fed Chair acknowledged that all components of the inflation indices are contributing to lowering prices for consumers.
Retail Sales – Holiday shopping started a month later this year than in 2022. Retail sales surged 0.3% in November after falling 0.2% in October, opposite last year’s trend. Eight of the 13 major categories posted increases, led by sporting goods, restaurants and bars, and online shopping. Department and electronic stores were the biggest losers, aside from gasoline sales which were down 2.9% due to lower gas prices. Consumers appear to be continuing their joy (or necessity) of bargain hunting, choosing to wait rather than begin buying early in the season. Lower prices may have spurred an increase in shopping. Apparel prices, for example, fell 1.3% in November, while sales were up 0.6%, the most in three months. This suggests purchasing activity remains strong and the consumer has not lost the spirit of shopping, just taking a more careful approach.
Note: Behind the Numbers will not be published next week. The report will resume on December 29.
Sarina Freedland – Senior Investment Officer
Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. This is for informational purposed only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.
|