I expect another downward move for inflation when the January Consumer Price Index (CPI) is reported on Tuesday. Economists surveyed by Bloomberg expect that the core consumer price index, which excludes move volatile food and fuel prices, will show a year over year rate of increase of 3.7% in January. That would be the slowest year-over-year increase since April 2021.
Maybe you can’t remember when the yield on the benchark 10-year Treasury fell through 4% and looked headed to 3.5%. It might be hard to remember because it was so long ago. Like two weeks. Today the yield on the 10-year Treasury completed a round trip, rising 14 basis points this morning to 4.16%.
Nothing like a bank surprise to get Wall Street in a lather. On Wednesday, January 31, New York Community Bancorp (NYCB) announced that it would cut its dividend and add to reserves against losses in its commercial lending portfolio. The stock fell 38% on Wednesday to hit a 23-year low on Thursday. The bad news wasn’t limited to U.S. banks either.Tokyo-based Aozora plunged more than 20% after warning of US commercial-property losses Frankfurt’s Deutsche Bank more than quadrupled its provisions against U.S real estate losses. I don’t see any reason to think that this is a one-day phenomenon. Or that the damage is just a minor problem in a few portfolios. Billionaire investor Barry Sternlicht warned this week that the office market is headed for more than $1 trillion in losses. “This is a huge issue that the market has to reckon with,” Harold Bordwin, a principal at Keen-Summit Capital Partners in New York, which specializes in renegotiating distressed properties, told Bloomberg. “Banks’ balance sheets aren’t accounting for the fact that there’s lots of real estate on there that’s not going to pay off at maturity.” On Monday then, I’m adding Put Options on the SPDR S&P Regional Banking ETF (KRE).
The Federal Reserve maintained its benchmark interest rate on Wednesday in a range of 5.25%-5.50%–as the financial markets expected. But the central bank pushed back more strongly than financial markets hoped on a March 20 schedule for the first cut in rates. “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%,” the Fed said in its policy statement.Fed chair Jerome Powell pushed back even moe strongly in his Wednesday press conference pushed back: A march cut is “probably not the most likely case or what we’d call the base case,” he said. “I don’t think it’s likely the Committee will reach a level of confidence by the time of the March meeting to identify March as the time to [cut rates].”
It’s a Federal Reserve meeting week, but I expect Apple’s (AAPL) earnings report for its December quarter to be the big event of the week. With the potential to move the tech sector and the market.
U.S. Gross Domestic Product (GDP) grew at an annual 3.3% rate in the fourth quarter, the Commerce Department announced today. That was down from the 4.9% annual growth rate in the third quarter, but substantially above the 2.0% rate expected by economists. For the full year, the US.economy expend at a 3.1% rate.
Federal Reserve officials were out with one message today: The slightly higher-than-expected CPI inflation number for December/the slightly-slower-than-expected slowdown in CPI inflation argues that there’s still more work to be done on bringing inflation down to the Fed’s 2% target. And that talk of a rate cut in March is premature.
Right now all that the bond market and indeed all the financial markets care about is when will the Federal Reserve begin to cut interest rates. The consensus is that sometime relatively soon–March or more likely June–the Fed will begin to deliver interest rate cuts that will total somewhere around 100 basis points (at least) for 2024. But what if the Federal Reserve and other central banks around the world really aren’t in control of interest rates in the bond market anymore?
The big short run question–at least ahead of the Federal Reserve’s March 20 meeting on interest rates–is whether the financial markets have gotten too far ahead of the Fed on the pace of interest rate cuts. Here’s what to watch.
I expect the Federal Reserve to continue to try talking back some of the enthusiasm that greeted its December 13 meeting and the release of a new set of Dot Plot projections showing that the median forecast of staff and policy makers at the U.S. central bank called for three interest rate cuts in 2024.
Today sure sounded like policy-makers remorse from the Federal Reserve. New York Fed President, the vice-chair of the Federal Reserve’s interest-rate setting Open Market Committee, said that central-bank policy makers weren’t actively debating when to cut interest rates. That’s sure not what the stock market heard on Wednesday.
In its December revision of its Dot Plot projections for interest rates in 2024, the median projection by the U.S. central bank’s staff and policy makers estimated three interest rate cuts by the end of 2024. The market, which had been hoping for exactly this news, cheered, and stocks moved to record or near record highs. And in reaction to the Fed’s news, Wall Street moved its forecasts to match the new projection. Barclays, for example, is calling for three cuts in 2024 and JPMorgan Chase moved its forecast for the start of cuts to June. But, on Wall Street nothing exceeds like excess so projections are pushing beyond the Fed’s median view.
