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Deciphering economic prospects is always challenging. The most recent FOMC statement and commentary shed some light on monetary policy, or at least narrowed the range of debate on timing.
The FOMC statement and Fed Chairman Powell’s commentary all but took March off the table for the first rate cut. See the Fed’s most recent policy statement.
Moreover, Fed officials had been focused on walking the market back from its expectations for a March rate cut even before the FOMC announcement. Fed official Christopher Waller highlighted in mid-January that while inflation may be on a path towards the 2% target, the strength in the labor markets and consumer confidence both suggest that the Fed may need to see more evidence that inflationary pressures are behind us before cutting rates.
Governor Christopher Waller comments on January 16th at the Brookings Institution
“This cycle, however, with economic activity and labor markets in good shape and inflation coming down gradually to 2 percent, I see no reason to move as quickly or cut as rapidly as in the past. The healthy state of the economy provides the flexibility to lower the (nominal) policy rate to keep the real policy rate at an appropriate level of tightness. But I will end by repeating that the timing and number of rate cuts will be driven by the incoming data.”
Key excerpts of the February FOMC statement include:
“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 percent.”
-According to the National Association of Realtors, December Home Sales of 3.78 million reflects a modest 1% decline.
-For the year, 2023 represents the lowest level of existing home sales (4.09 million) in nearly three decades.
-The median price of $389,000 reflects a record high.
Number of Existing Homes Sold in the U.S.
-January U.S. retail and food services were down .8% from the previous month, but up .6% vs January 2023. January Retail Sales Report
Economic prospects for the consumer appear to be the most resilient, reflected below (Ycharts graph)
-Notwithstanding reports of a concerned consumer base, consumer confidence, as measured by The Conference Board, increased in December to 110.7, and increased further in January t0 114.8. This is an increase from a revised 101 in November, reflecting an ease of concerns regarding a recession. The January Consumer Confidence report reflects a slight increase in consumer optimism and is worth a quick read: January Consumer Confidence Report
The Expectations Index, a measurement of consumers’ short-term outlook for the labor market, business, and income, rose to 85 vs 77.4 in November, according to the Conference Board. The next Consumer Confidence report will be released on January 30th at 10am.
In short,”January’s increase in consumer confidence likely reflected slower inflation, anticipation of lower interest rates ahead, and generally favorable employment conditions as companies continue to hoard labor,” said Dana Peterson, Chief Economist at The Conference Board. ”
Nonfarm payrolls for January climbed by 353,00, well above expectations and yet another sign of strength in the labor market. Unemployment stands at 3.7%, and the labor participation rate has also held steady. Wage increases of .4% for the month and up 4% year over year were slightly above consensus but well within investors’ comfort zone concerning inflation.
As outlined in the graph below, the labor market has largely shaken off the Covid era as unemployment and participation rates continue to move forward. See the Employment Report
Source: Bureau of Labor Statistics US Department of Labor
The markets have concluded that inflationary pressures are behind us. The markets may have it right, directionally. CPI increased by .3% in January, reflecting a 3.4% increase over the last twelve months. The release was in line with many expectations, however, was also instrumental in resurfacing some nervousness as to whether inflation is fully under control.
See the January CPI Release The next CPI release will be on February 13th at 8:30 A.M. Eastern Time.
The sub-prime loan market is often viewed as a harbinger of the economy’s health. Thus, it is worth taking a look at recent delinquency rate trends.
The Mortgage Bankers Association (MBA) reports a Q3 % delinquency rate of 3.62% for mortgage loans on one-to-four-unit residential properties. This is up from the previous quarter and the same period in 2022.
The delinquency rates for subprime auto loans also underscore the growing subprime sector stress. S&P Global Ratings notes that in April 2023, the 60-plus-day delinquency rate for subprime auto loans reached 4.84%, an increase vs 4.63% in the prior month. This is significantly higher than the pre-pandemic level of 4.33% in April 2019. Fitch Ratings reported that the percentage of subprime auto borrowers at least 60 days past due on their loans reached 6.11% in September 2023, the highest level since 1994.
A more comprehensive discussion of recent developments in the subprime market can be found on CapitalMarkets.com Market Perspectives: On the Watchlist: Subprime Loans.
The Way Forward
The continued rally in Treasuries, equities, and corporate spreads has driven a surge in corporate bond issuance in January. Corporate credit spreads, a reflection of market confidence, have rebounded sharply and are again approaching all-time lows. Corporate new issues are on track to achieve record levels by the end of Q1 as a result. 2024 Bond New Issues Look Promising
2024 Economic Prospects
As 2024 continues to unfold, the markets that were ahead of Fed policy have now been reminded by the most recent FOMC statement and associated commentary that patience should prevail. While there will always be speculation as to the Fed’s next move, the market is now discovering how important it is not to get out in front of Fed policy itself.
CapitalMarkets.com is managed by individuals who have worked in the capital markets for over 25 years. Contributing writers include professionals and financial journalists with unique experiences across the capital markets.