The pace of improvement in the U.S. inflation rate is set to slow in the coming year. According to the economists surveyed by Bloomberg in its latest monthly outing, the core personal consumption expenditures (PCE) price index-—-the Federal Reserve’s preferred measure of inflation–will still be running at a 2.5% pace at the end of 2024. That’s up slightly from the 2.4% prediction in last month’s Bloomberg poll. Importantly it’s still significantly higher than the Fed’s 2% target inflation rate.
I expect a week heavy with Fed-speak with the Federal Reserve’s pre-meeting quiet period due to start on Saturday, December 2, this week is the central bank’s last chance to shape market sentiment before the December 13 meeting of the Open Market Committee. That’s the Fed body that sets interest rates, just in case you’ve forgotten. The December 13 meeting date also includes the release of the quarterly update of the Fed’s Dot Plot projections on interest rates, inflation, GDP growth, and unemployment for 2024.
Initial claims for unemployment fell by 24,000 to 209,000 in the week ending November 18, the Labor Department said n Wednesday. That was the biggest drop since June. Continuing claims, the number of people continuously receiving unemployment benefits, slipped to 1.84 million in the week ended Nov. 11. That was the first drop in two months.
Until this week, the consensus was that the Federal Reserve would begin to cut interest rates in July (or maybe June.) As of Friday, November 17, however, the CME FedWatch Tool, which calculates the odds of a Fed move from prices in the FedFunds Futures market, put chances of a interest rate cut at the central bank’s May 1 meeting at better than 50%.
More news this morning pointing to a slowing economy. Initial claims for unemployment for the past week rose 13,000 to 231,000, the Labor Department Reported this morning. That’s the highest weekly figure in three months. And is yet another sign that the economy is cooling. Which would encourage the Federal Reserve to call an end to it interest rate increases and, maybe even, start to cut rates relatively soon. At least that’s how the bond market read the numbers.
Today stocks and bonds both paused to think about yesterday’s huge rally.
Core Consumer Price Index inflation came in at a 4.0% annual rate in October, the Bureau of Labor Statistics reported this morning, November 14. Economists had projected a 4.1% annual rate for October. And that 1 basis point, small as it was was enough to send stocks and bonds soaring. At the close, the Standard & Poor’s 500 was up 1.91%.
I expect Tuesday’s Consumer Price Index report for October to be critical in determining whether the Christmas rally narrative can be sustained.
My bets on rising volatility have been hammered in the last few days. The December 20 Call Options on the CBOE S&P 500 Volatility Index (VIX) at $280 a contact dropped another 21% today to $121 a contract. The January 17 Call Options at 17 that I bought for $268 closed at $211, down another 16%.The VIX itself ended the day at 14.23, down 7% for the session. It’s sure hard looking at losses like this. But I would remind you that the VIX is very volatile. The volatility index was at 21.71 on October 20. And that the calendar is marked with two big events that could reunite financial market volatility, one courtesy of the House of Representatives and the other courtesy of the Federal Reserve.
Eight days ago Federal Reserve chair Jerome Powell set off a financial market rally when the markets thought they heard him signal that the Fed was done with interest rate increases. Today, November 9, Powell very clearly said (at an International Monetary Fund conference in Washington) that the Fed won’t hesitate to raise rates if a hike is needed. Other Fed officials have recently said the same thing.
The financial markets continue to swing from extreme to extreme in sentiment. The markets were wrong at the beginning of last week. It’s likely the markets are wrong again.
Certainly, it wasn’t any surprise that at today’s meeting the Federal Reserve decided to keep its policy rate steady at 5.25% to 5.50%. Going into the meeting the CME FedWatch tool put the odds of the Fed standing pat on rates at close to 100%. So why then the huge rally in the 10-year Treasury that pushed yields down 18 basis points on the day to 4.76%?