The Federal Reserve’s preferred measure of U.S. inflation–the core personal consumption expenditures (PCE) price index, which strips out volatile food and energy prices–rose 0.2% in April from March.That was the smallest advance in 2024, according to Bureau of Economic Analysis data out Friday. And there was more evidence of a slowing economy today.
I expect Wall Street’s last rate cut bulls to get gradually less bullish. With means, expect to see interest rates (and Treasury yields) continue to rise, and the consensus on when the first cut in rates from the Federal Reserve to continue to move later in 2024. This past week economists at Goldman Sachs threw in the towel on their projections for a July interest rate cut by the Federal Reserve. The investment company moved its forecast for an initial cut to September.“Earlier this week, we noted that comments from Fed officials suggested that a July cut would likely require not just better inflation numbers but also meaningful signs of softness in the activity or labor market data,” the economists wrote in a note.Goldman Sachs had been one of the last banks on Wall Street betting the Fed would start lowering interest rates in July. JPMorgan Chase and Citigroup are among the few holdouts still forecasting a July move. Goldman is still predicting two interest rate cuts in 2024. The swaps market now fully prices in a December cut. The odds of a second reduction in 2024 stand at less than 30%, compared with about 70% last week. At the end of 2023, the first Fed cut was expected as early as March.
Today’s video is The Uncertainty of Uncertainty in the Stock Market. Right now we’re seeing uncertainty on top of uncertainty. The CPI numbers just came out and April showed a slightly lower annualized inflation rate than March. The market took this as a signal that we’ve moved past inflation stagnation and have resumed the march towards 2%. This is, of course, an uncertainty. Another uncertainty is the what we don’t know about the inner thinking at the Fed. How much of a decline does the Fed really need to see to start cutting rates? Right now, according to the CME Fedwatch tool, there is a 70% chance that we’ll see interest rate cuts at the September Fed meeting. This prediction has shifted a lot in the last few months and could continue to shift. These uncertainties mean that the market may be fully priced at 5,200. Some analysts suggest we could hit 5,600 by the end of the year, making it a 15-20% year. In the short term, it’s really hard to predict how people react to all these layers of uncertainty. It’s also difficult to hedge this market so I recommend looking at individual stocks in lithium or copper that will continue to go up, even if the market as a whole doesn’t move.
Today’s video is How big a danger is consumer debt? The Federal Reserve has been slowly trying to get inflation down one more percentage point by slowing the economy (without crashing it). One of the things the Fed looks at is how consumers are doing. Consumer revenue is about 70% of the overall economy and consewuently the Fed has been keeping an eye on consumer debt. At the moment, debt as we can measure it, is at a high level with credit card delinquencies at 3.5% in December 2023, the highest since the current data series istarted in 2012. But that number doesn’t capture everything gong on with consumer debt since the increasingly popular Buy Now, Pay Later products aren’t included in the big consumer debt measurements. Thes products let people stretch or delay payments by cutting them into installlments. The Buy now/pay later market is currently only about $18 billion but is projected to hit $700 billion by 2029. What’s th deliquency ratw for Buy now/pay later? No one knows because the companies providing Buy Now, Pay Later programs don’t report delinquencies to credit bureaus. Anecdotally, the delinquwncy rate seems high. A Bloomberg survey found that about 43% of people in Buy Now, Pay Later programs say they’re behind or feeling pressure on their payments. 28% say they’re delinquent on other debt as a result of these payments. Th Fed faces a tough enough job of sailing the economy to a safe harbor without having to steer blind n a big and growing part of the markrt for consumer debt. My worry is that the economy may be slowing faster than the Fed would hope or can accurately measure. Keep an eye on this as the Fed continues to push rate cuts further and further down the road.
I expect surface quiet but important movement in the lower depths of the financial markets. The week ahead lacks in obvious market-moving events and reports. There’s a smattering of earnings with Disney (DIS) on May 7 and Toyota Motor (TM) on May 8. But nothing from the likes of Apple (AAPL) or Microsoft (MSFT). A few speeches from Federal Reserve officials–Fed governors Lisa Cook on May 8 and Michelle Bowman on May 10. But no Fed meeting. No testimony from Fed chair Jerome Powell. But deep in the workings of the bond market, this will be a big week. The Treasury will auction $112 billion in Treasury paper.
The U.S. economy added 175,000 jobs in April, the Bureau of Labor Statistics announced on Friday. That was the smallest number monthly new jobs in six months. The unemployment rate ticked up to 3.9%. And traders tried once again, to get ahead of the data. Concluding that slower job growth, meant the Federal Reserve would be more likely to cut interest rates sooner–in September, say, rather than November or December–bonds rallied and yields fell. The yield on the 10-year Treasury dropped 7 basis points to 4.5%. The yield on the 2-yer Treasury, which had been flirting with 5% earlier in the week, fell to 4.82%. Stocks climbed with the Standard & Poor’s 500 up 1.26% and the NASDAQ Composite gaining 1.99%. Trouble is that these moves were the exact opposite of gains and losses earlier in the week.
On Wednesday, May 1, the Federal Reserve decided NOT to cut interest rates at its May 1 meeting. That was the decision expected by the financial markets. And Federal Reserve chair Jerome Powell tried his best to keep traders from speculating that the Fed would actually raise interest rates, rather than cut them, in the remainder of 2024.
The employment cost index (ECI), which measures wages and benefits, increased 1.2%, the most in a year, after rising 0.9% at the end of 2023, according to a report from Bureau of Labor Statistics on Tuesday, April 30. The increase was greater than projected by any economist in Bloomberg’s survey of economists.Compared with a year earlier, the ECI, the Fed’s preferred measure of employment costs, climbed 4.2% after a similar annual increase in the fourth quarter.
Yesterday we had a report of core Personal Consumption Expenditure for March that showed core inflation ticking up to an annual rate of 3.8% from 3.7%. Core inflation, if you remember, looks at prices after excluding more volatile food and energy prices, The reasonable conclusion was that inflation was remaining stubbornly higher than the Federal Reserves % target. And that the first cut to interior rates from the Fed wouldn’t come until December, instead of July or September. Today we got the report on all-items PCE inflation.
U.S. economic growth slowed in the first three months of the year, the Bureau of Economic Analysis reported today. Gross Domestic Product (GSP) grew at an annualized rate of just 1.6%. That’s a big retreat from the 3.4% annual rate in the fourth quarter of 2023. Just as important as the drop in the growth rate itself is the reason for the decline.
One down and billions more to go.
Yesterday’s big auction of 2-Year Treasury notes saw rock solid demand that let the day pass without a big, destabilizing drop in prices and a jump in yields. Today, in Round #2, the Treasury is set to auction off $70 billion in five-year notes. So far, at least, the sale looks like it will see solid demand again. Though, can I say, You ain’t seen nothing yet? Treasury is likely to increase its monthly issuance of the seven main notes and bonds (not including TIPS) by nearly 60% in 2024 to $354 billion in August 2024, from the $222 billon it issued in July 2023, according to “Neutral Issuance” scenario in the presentation by the Treasury Borrowing Advisory Committee.
It’s been a tough month for Treasuries with yields rising on a re-thinking of when the Federal Reserve might begin to cut interest rates. The yield on the 10-year Treasury closed at 4.62% on Friday. That’s an increase in yield of 35 basis points in a month. (When yields climb, bond prices fall.) And this week the Treasury will auction a combined $183 billion of two-, five- and seven-year Treasury notes. Ans that’s ahead of the latest update on the Personal Consumption Expenditures index, the Federal Reserve’s preferred inflation measure.
