SPLV - Weekly Commentary: On Fire
2024-01-29 09:24:00 ET
Summary
- The economy has gained a head of steam since the FOMC’s December 13th meeting. Additional stronger-than-expected data this week.
- Q4 GDP was reported at 3.3%, down from Q3’s blistering 4.9%, but significantly above the 2.0% consensus estimate.
- Markets have fully embraced their beloved bullish narrative and are ready to impose their will. Powell better focus on inflation and rate cuts, or markets might throw a little tantrum.
Could the backdrop going into next Wednesday’s Powell press conference be any more intriguing?
The economy has gained a head of steam since the FOMC’s December 13th meeting. Additional stronger-than-expected data this week. Q4 GDP was reported at 3.3%, down from Q3’s blistering 4.9%, but significantly above the 2.0% consensus estimate.
At 50.3 (estimate 47.6), the January Manufacturing PMI Index was the strongest since October ‘22’s 50.4. New Orders rose to 52.2, the high since last June. With a reading of 52.3, the Services PMI also surpassed forecasts (51.5) to a seven-month high.
Mortgage Purchase Applications popped another 8%, while December Pending Home Sales rose 8% to the highest level since July. New Home Sales were stronger-than-expected (664k vs. 649k). The rise (0.7%) in December Personal Spending hasn’t been stronger since last January, with Spending up 5.9% y-o-y.
Robust data had curiously little impact on rate cut expectations. The market is still at about 50% likelihood of a cut at the March 20th meeting and is pricing 33 bps of cuts by the May 1st meeting. Encouraging inflation reports have countered strong economic data. Q4 Core PCE was reported at 2.0%, matching Q3’s level. For perspective, Core PCE was at 4.7% during Q4 ’22 and 5.2% for Q4 ’21. A key Fed inflation gauge, December’s monthly PCE, was reported at 0.2% (2.6% y-o-y), with Core PCE at 0.2% (2.9% y-o-y).
Financial conditions have loosened dramatically, and highly speculative financial markets have performed spectacularly, while key inflation measures confirm an easing of pricing pressures. The backdrop would seem conducive to a return of “Balanced Powell.” Having jumped on the dovish pivot bandwagon, markets anticipate the Fed Chair laying the groundwork for an imminent rate cut. The thinking is that the FOMC will want to ensure it has rate cuts on the books well before November.
Seems the Fed is in a pickle of its own making. It was a mistake to begin talking rate cuts with conditions so loose and markets booming. The economy was administered a shot of adrenaline, pushing the timeline for economic weakness and resulting rate cuts out closer to election time. If the Fed is determined to get cuts underway, it will have to lean hard on weaker inflation data, while disregarding the speculative market Bubble and notably loose financial conditions. That would be a mistake.
Markets have fully embraced their beloved bullish narrative and are ready to impose their will. Powell better focus on inflation and rate cuts, or markets might throw a little tantrum....
Weekly Commentary: On Fire