As long-time Barron’s pundit Randall Forsyth aptly wrote in this weekend’s edition, “Which one of these doesn’t belong? Inflation above target. Solid labor market. Booming stock market. Federal Reserve interest rate cuts.” The obvious answer, Fed interest rate cuts, is also seemingly the one thing supporting risk markets here in 2024. Should Chair Powell and his colleagues decide to postpone policy moves into next year, markets could see unexpected volatility arise.
As for the U.S. consumer and the economy writ large, Goldilocks herself might be envious. The “not too hot, not too cold” metaphor equates to the perfect environment for investors. And, after a decade of paltry bond yields, even fixed income investors can get excited. Whether or not the economy can sustain this equilibrium longer-term is anyone’s guess, but for now, it pays to stay invested.
The 3rd reading of 2023 Q4 GDP showed the economy grew at a stronger than expected +3.4% rate, with Personal Consumption up +3.3% and the Core PCE Price Index rising +2.0% QoQ. The Atlanta Fed GDPNow Forecast has the economy slowing to a +2.3% growth rate, which may be a welcome occurrence given the Fed’s current battle against inflation. Unless, of course, it portends Stagflation, which is an increasingly popular topic in the fixed income arena.
The Fed’s favorite inflation indicator, the Personal Consumption Expenditure index, rose +0.3% in February, and is up +2.5% YoY. The Core PCE also gained +0.3% MoM, and shows ex-food & energy prices are higher by +2.8% YoY. Headline CPI was up a hotter than expected +0.4% MoM in February (+3.2% YoY), while Core CPI was up +0.4% MoM and +3.8% YoY. Producer prices surged +0.6% MoM, but have only risen +1.6% YoY.
The Employment picture in the U.S remains stable, with the jobless rate coming in at 3.9% in February, higher than expected, although Nonfarm Payrolls increased by a better than forecast +275k. Average Hourly Earnings have risen +4.3% YoY, and the Labor Force Participation rate edged up to 62.5%. Initial Jobless Claims remain consistent around the 210k level.
With inflation down considerably from it’s peak, although still above the Fed’s professed target of 2.0%, the FOMC must remain on guard against prematurely cutting interest rates. Markets are slowly embracing this go-slow Fed approach, and expectations are moving towards 3 cuts here in 2024, down from the 5-6 moves anticipated at the start of the year.
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