The big event of the week will be Friday’s report on the Personal Consumption Expenditures (PCE) inflation index. This, rather than the CPI, is the inflation measure that the Federal Reserve watches.
Remember the good ol’ days when Treasuries paid 0% or so and you had to give a bank your toaster to open an account, paying 0.01%? Right now you can find a CD paying 5%–and it doesn’t require locking up your money until the sun goes super-nova either.
Today, the 12-month Treasury closed with a yield of 4.99%. And the 6-month bill paid an even higher 5.02? You can find a bond ETF with an SEC yield of 4.63%. And even a money market fund paying 4.45%. What’s the case for stashing some of your cash in something “safe” as the stock market looks like it’s about to go into one of its periods of volatility? And what’s the best choice when you’ve suddenly got so many vehicles offering to pay you 5% or so? In today’s post, I’ll sketch out the pluses and minuses of these alternatives.
The comments come from two of the Federal Reserve’s most hawkish members on the need for higher interest rates to combat inflation, so the remarks aren’t exactly a surprise. Nonetheless, the language does push the envelope on thinking about where the Fed’s interest rate peak for this cycle of interest rate increases might be.
Economists at Bank of America and Goldman Sachs now see the Federal Reserve extending its interest-rate increases through the June Fed meeting.
U.S. retail sales in January jumped by 3% in January from December, the Commerce Department reported today, February 15. Economists surveyed by Bloomberg had expected a 2% increase. Retail sales had dropped in December and November. Together with the strong job gains in January, this data point reduces the likelihood of a recession in 2023 and increases the odds that the Federal Reserve will continue to raise interest rates after its May 2 meeting.
Stocks didn’t move much today after the Consumer Price Index for January showed enough inflation strength to bring Federal Reserve officials out in force to talk about a potential need to raise interest rates above current financial market expectations. But other indicators–the CME FedWatch Tool, most obviously–showed that investors and traders continue to reposition for more interest rate increases beyond the Fed’s May 3 meeting.
You’ll find it in the market for interest-rate options if you really dig through the data. Which Bloomberg has. On Tuesday, a trader amassed a large position in options that would make $135 million if the central bank keeps tightening until September and interest rates hit a peak of 6%.
Today I posted my two-hundred-and-thirty-fourth YouTube video: Why March 22 Is the Next Big Date Today’s topic is: Why March 22 Is the Next Big Date. March 22 is the date of the Fed’s next meeting. And it’s the first time we’ll get projections from the Fed on where interest rates will peak since the last Dot Plot in December. The market has been playing catch-up with the Fed since that December meeting. A hopeful market thought that the Fed was being too aggressive in their estimates of a peak of 5.00% to 5.10%, but the recent surge in jobs in January has made the market fall in line with the Fed’s expectations. As of February 7, the market had priced in a 25 basis point increase in March and May, with a peak hitting in June or July at 5.12% (nearly exactly the same as the Fed’s December projections). Just a week ago, the market was looking at a 4.9 peak in possibly May. The market has shifted to catch up with the Fed, but now we have to wait until March 22 to see if the Fed has moved the peak interest goalposts. In the meantime, I don’t expect the market to move much as we wait for the March 22 Fed meeting.
On the one hand, stock markets heard Federal Reserve Chair Jerome Powell reiterate his comments of last week that “disinflation” had become visible. On the other hand, bond markets and investors betting on the direction of the Fed Funds rate heard the Fed chairman tell the audience at the Washington Economics Club this morning, that the labor market remains extraordinarily strong, and if the jobs market doesn’t cool, the Federal Reserve will need to take its peak interest rate higher.
Do the huge January job gains mean that the Federal Reserve will raise interest rates to a higher peak? That was the worry today and it was enough to send the Standard & Poor’s 500 0.61% lower at the close and to knock a solid 1% off the NASDAQ Composite. The NASDAQ 100 fell 0.87% and the small-cap Russell 2000 lost 1.40%.
Was it accidental or intentional? We’ll find out on Tuesday when Fed chair Jerome Powell answers questions at the Economics Club in Washington. On Wednesday, February 1, in his post-Fed-meeting remarks, Powell came across as more dovish on inflation and interest rates than many Wall Street strategists and the financial markets had expected.
Today, Friday, February 3, the Bureau of Labor Statistics reported that the U.S. economy added a whopping 517,000 jobs in January. Economists had been expecting more along the lines f 50,000 jobs added in the month. The huge January surge took the headline unemployment rate to 3.4% The last time the unemployment rate was this low was May 1969. On the surface, the stronger, the much stronger, than expected job gain in January will put pressure on the Federal Reserve to continue raising interest rates. If the labor market is booming, it’s hard o see inflation coming down rapidly. But the real story here may be beneath the surface.
