Friday, March 22nd, 2024
There’s simply no denying how strong the stock market has been this week. Much of the credit for this goes to the Fed’s announcement in its most recent quarterly “dot plot” that three 25 basis-point (bps) interest rate cuts are coming at some point this year. But in actuality, markets were buoying higher ahead of the Fed meeting, following a slightly down week last week. That said, year to date both the Nasdaq and S&P 500 are up double-digits already.
Last week’s Consumer Price Index (CPI) report brought us a new Inflation Rate (headline CPI year over year), which ticked up 10 bps to +3.2%. But the Fed did not see this as bad news; pulling back focus, we were grappling with +5% inflation rates back in March of last year. We peaked at +9.1% in June 2022, based largely on supply chain disruptions surfacing from the Great Reopening following the pandemic. This was the highest rate of inflation since October of 1981 — Ronald Reagan’s first year in office.
Thus, while +3.2% is still noticeably higher than the optimum +2% inflation rate the Fed is shooting for, the monetary policy body sees its historically high Fed funds rate working properly to curb inflation. We’ve been at 5.25-5.50% since July of last year, and we still have 13 weeks’ worth of data between now and the Fed’s June meeting to see a continued ramp-down of inflation metrics for that first rate cut — to 5.00-5.25%, still historically high — to take place.
Meanwhile, Leading Economic Indicators for last month swung to a positive +0.1% from -0.1% expected and -0.4% posted in January. S&P Flash PMI Manufacturing ticked up 30 bps month over month to 52.5, easily above the crucial 50-level which determines growth. (The same report on the Services side fell 60 bps month over month to 51.7, but still north of 50.) So while the Fed sees a path to more accommodative interest rate levels, other aspects of the economy are still growing nicely, We like to call these “Goldilocks” numbers.
Next week brings us the comprehensive Personal Consumption Expenditures (PCE) report for February, which Fed Chair Jerome Powell often cites as the Fed’s preferred metric on inflation. Year over year headline came in at +2.4% last month, +2.8% on core year over year, which are figures obviously much closer to that optimum +2% inflation rate. We’ll be paying close attention when that comes out next Friday, which is also the latest trading day of calendar Q1.
This morning, pre-markets are slightly hung over from a nearly full week of market exuberance. Both the dow and S&P are -3 points at this hour, while the Nasdaq is -25 points currently. Bond yields on the 2-year and 10-year remain inverted but are steady, at 4.22% on the 10-year and 4.60% on the 2-year — you’ll notice that 4.6% is precisely where the Fed expects the Fed funds rate to slim down to by the end of the year.
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Markets Revisiting Goldilocks This Week
Friday, March 22nd, 2024
There’s simply no denying how strong the stock market has been this week. Much of the credit for this goes to the Fed’s announcement in its most recent quarterly “dot plot” that three 25 basis-point (bps) interest rate cuts are coming at some point this year. But in actuality, markets were buoying higher ahead of the Fed meeting, following a slightly down week last week. That said, year to date both the Nasdaq and S&P 500 are up double-digits already.
Last week’s Consumer Price Index (CPI) report brought us a new Inflation Rate (headline CPI year over year), which ticked up 10 bps to +3.2%. But the Fed did not see this as bad news; pulling back focus, we were grappling with +5% inflation rates back in March of last year. We peaked at +9.1% in June 2022, based largely on supply chain disruptions surfacing from the Great Reopening following the pandemic. This was the highest rate of inflation since October of 1981 — Ronald Reagan’s first year in office.
Thus, while +3.2% is still noticeably higher than the optimum +2% inflation rate the Fed is shooting for, the monetary policy body sees its historically high Fed funds rate working properly to curb inflation. We’ve been at 5.25-5.50% since July of last year, and we still have 13 weeks’ worth of data between now and the Fed’s June meeting to see a continued ramp-down of inflation metrics for that first rate cut — to 5.00-5.25%, still historically high — to take place.
Meanwhile, Leading Economic Indicators for last month swung to a positive +0.1% from -0.1% expected and -0.4% posted in January. S&P Flash PMI Manufacturing ticked up 30 bps month over month to 52.5, easily above the crucial 50-level which determines growth. (The same report on the Services side fell 60 bps month over month to 51.7, but still north of 50.) So while the Fed sees a path to more accommodative interest rate levels, other aspects of the economy are still growing nicely, We like to call these “Goldilocks” numbers.
Next week brings us the comprehensive Personal Consumption Expenditures (PCE) report for February, which Fed Chair Jerome Powell often cites as the Fed’s preferred metric on inflation. Year over year headline came in at +2.4% last month, +2.8% on core year over year, which are figures obviously much closer to that optimum +2% inflation rate. We’ll be paying close attention when that comes out next Friday, which is also the latest trading day of calendar Q1.
This morning, pre-markets are slightly hung over from a nearly full week of market exuberance. Both the dow and S&P are -3 points at this hour, while the Nasdaq is -25 points currently. Bond yields on the 2-year and 10-year remain inverted but are steady, at 4.22% on the 10-year and 4.60% on the 2-year — you’ll notice that 4.6% is precisely where the Fed expects the Fed funds rate to slim down to by the end of the year.
Questions or comments about this article and/or author? Click here>>