Better than expected economic data in November appears to be thwarting the FOMC’s efforts to engineer lower short-term interest rates. While good news for the US economy, this continued economic strength could pose challenges for investors should the Fed pause further interest rate reductions.
The Unemployment Rate in October held steady at 4.1%, while Average Hourly Earnings ticked up a stronger than expected +0.4% MoM, and have now risen +4.0% year over year. Weekly Initial Jobless Claims were fairly steady in November coming in around 215k, while Continuing Claims hovered around 1,900k. All in all the labor market continues to exhibit strength as we approach year-end, potentially helping contribute to a strong holiday shopping season.
Inflation remained steady in October, though stubbornly above the Fed’s stated goal of 2.0%. The Consumer Price Index (CPI) rose +0.2% MoM and +2.6% YoY, while ex-food & energy, prices rose +0.3% MoM and +3.3% YoY. At the wholesale level, the Producer Price Index edged up +0.2% MoM and +2.4% YoY, while Core PPI rose +0.3% MoM and +3.1% YoY. Lastly, the Core PCE Price Index ticked higher by +0.3% for the month and +2.8% YoY. None of these numbers should give the Fed confidence that it can achieve its stated goal of targeting 2.0% inflation, and investors are left to wonder if further easing is warranted.
The housing market remains a key component of the inflation mix, with the S&P CoreLogic CS 20-City Index rising +0.2% in September and +4.6% YoY. Existing Home Sales for October rose a better than expected +3.4% MoM although New Home Sales fell -17.3% from the month before. Higher interest rates, and the resulting higher mortgage rates, have hampered supply of available for sale housing stock with many homeowners having borrowed at 3-4% reluctant to sell only to have to borrow at 6-7% rates.
The Fed’s initial 50 basis point cut in September may have proven overly aggressive given the current spate of solid economic data. With 3rd quarter GDP showing 2.8% economic growth, future Fed cuts remain in doubt. Investors betting on materially lower short-term interest rates may be disappointed. As the new administration sets its priorities for 2025 and beyond, continued deficit spending should set a floor on how low government bond yields can go. Should “tariff talk” escalate into a full-blown trade war, global growth prospects would likely wane, taking some pressure off of the Fed and potentially allowing for further rate cuts.
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