The first quarter of 2024 has investors of all stripes focused on the prospects for Federal Reserve rate cuts, with the interest rate futures market pricing in a more aggressive pattern of cuts than Fed officials are suggesting. This has led to the “good news is bad news” paradigm, with positive economic data being met with negative moves in both the equity and fixed income markets. As we go to press, futures are pricing a 60% probability for a 50bp cut by June.
Economic data, particularly around employment, remain robust. Inflation, while steady, is still above the Fed’s target rate of 2%, and US GDP for Q4 shows the economy growing at a 3.2% annual rate. The Atlanta Fed GDP Now Forecast suggests 3% annualized growth for the first quarter.
The Unemployment Rate in January held steady at 3.7%, although Nonfarm Payrolls surged by 353k (versus expectations for +185k). The JOLTS reading for December ticked back up over 9 million openings, and weekly Initial Jobless Claims have yet to break meaningfully higher. In sum, the U.S. employment picture remains strong, and is the backbone of the “no-landing” thesis.
Inflation could prove more nettlesome, however, as it may prevent the Fed from cutting short-term rates in 2024, which would likely prove unsettling to equity markets. The Fed’s preferred inflation measure, the Personal Consumption Expenditure (PCE) Deflator, rose +0.3% in January, and is up +2.4% YoY. The Core PCE, which strips out volatile food and energy prices, rose +0.4% MoM, and is up +2.8% YoY. These numbers remain above the Fed’s target of 2% inflation, and may serve to delay interest rate cuts.
The outlook for the US economy remains strong, despite increasing geopolitical unrest and election-year angst. Corporate earnings rose YoY in Q4, the demand for labor is high, the housing market is strong, and thus far, higher interest rates haven’t triggered widespread distress. As mentioned up top, a lot rests on the Fed this year, with cuts to Fed Funds providing a risk tail-wind, but a more hawkish Fed potentially disrupting this Goldilocks situation we find ourselves in.
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