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Economic Update 3-25-2024

• Economic data for the week included the Federal Reserve keeping interest rates unchanged, coupled with a continued balanced narrative. The index of leading economic indicators ticked up for the first time in years, coupled with stronger housing data, including improved existing home sales, starts, and homebuilder sentiment.

• Equities saw gains again around the world, led by strength in the U.S. and Japan. Bonds gained in the U.S. with a broad drop in yields, while foreign bonds were mixed, along with a stronger dollar. Commodities were little changed for the week with minimal price movement in crude oil.

U.S. stocks continued a run of positivity, with the mid-week FOMC decision of leaving rates unchanged being far from a surprise, but the dovish press conference commentary boosted market sentiment, relative to the more hawkish tone that had been expected. Nearly all sectors saw gains last week, led by communications and consumer discretionary, up several percent each, while defensives health care rose a fraction of a percent. Real estate fell a fraction of a percent as well, despite improvements in interest rates. Sentiment in tech remained high, specifically with AI and trend leader Nvidia, as well as rumors of a possible Google-Apple AI-related partnership. Apple, however, was also held back by the U.S. government’s new lawsuit on anticompetitive grounds, with the claim that the iPhone prevented other firms from offering competitive services (via apps). This is not overly surprising, in a string of suits, including Google last year and separate investigations by the FTC against Amazon and Meta. Over the weekend, the President signed a $1.2 tril. government funding package, which avoids the possibility and uncertainty of a partial government shutdown.

At their March meeting, the Federal Reserve Open Market Committee kept the Fed funds range unchanged at 5.25-5.50%, where it’s been since last July. There were no dissents. The formal statement today was barely changed from January, when it was updated to a narrative depicting a more ‘balanced’ set of risks. Today, job gains were described from ‘moderated’ to ‘remain strong.’

Based on CME Fed funds futures markets, the probability of no action for March had risen to 99%, being in the high 90’s over the past month. For June, the chances of at least one 0.25% rate cut have run about 55-60% over the last few weeks. For September, the highest odds point to two cuts, and by December, the base case is three cuts to 4.50-4.75%. For Sept. 2025, the furthest-out estimate, the highest odds are for 5-6 cuts to around 4.00%. The number of assumed rate cuts has fallen over the last few weeks, as today’s sentiment reflects the narrative of improved growth and still-sticky inflation.

Economic Update 3-19-2024

• Economic data for the week included a rise in retail sales, and a small increase in industrial production, while consumer sentiment fell back. U.S. consumer and producer inflation both came in a bit sticky on a monthly basis, but still well down from levels in prior months.

• Equities were mixed, with little change on net in U.S. and foreign markets, despite some divergences on a regional basis. Bonds fell back with rising yields, related to higher recent inflation readings. Commodities gained, driven by energy and industrial metals.

Economic Update 3-11-2024

• Economic data during the week included the ISM services falling back a bit but remained in expansion. The employment situation report was mixed, with decent February growth offset by prior month revisions.

• Equities fell back in the U.S., saw decent performance abroad. Bonds gained as yields fell across the curve. Commodities were mixed, with a drop in energy and a rise in metals.

U.S. stock sentiment was seemingly again driven by the back-and-forth of whether Federal Reserve rate cuts would be coming sooner rather than later. Fed Chair Powell’s testimony to Congress last week included that the short-term rate was ‘likely at its peak for this tightening cycle,’ with dialing back policy restraint this year, while also noting the risks of reducing interest rates too soon, as evidence showed the economy is growing, not moving towards recession. At the same time, greater confidence is still needed that inflation has been beaten, although they’re ‘not far’ from that place. This was taken by markets as another sign of around June as the starting point for policy easing, based on action seen in Fed funds futures markets.

Economic Update 2-26-2024

• On the holiday-shortened week, economic data releases included another decline in the index of leading economic indicators, while existing home sales rose.

• Equities gained worldwide, led by the U.S. technology sector, improvement in developed market growth conditions, and stimulus in China. Bonds ticked higher as yields fell back a bit from the prior week. Commodities were mixed, with little change in crude oil prices.

Economic Update 2-20-2024

• Economic data for the week was mixed, including disappointments in retail sales and industrial production. Consumer and producer inflation both came in higher than expected, while housing data was mixed, with fewer starts but stronger builder sentiment.

• Global equities saw gains last week, despite mixed economic data. Bonds fell back as interest rates ticked higher along with higher-than-expected inflation data. Commodities were little changed, with crude oil prices only slightly higher.

U.S. stocks started decently but ran into the wall of CPI inflation on Tuesday morning, which showed less improvement than expected. However, weaker retail sales helped the slowing growth narrative, as the timing and depth of interest rate cuts have been the primary concerns of markets over the past several weeks. While there were a variety of factors related to the new year, stickier prices could cause the Fed to delay the implementation of rate cuts further into the year.

Economic Update 2-12-2024

• In a quiet week for economic data, the ISM services index rose further into expansion, jobless claims improved, while the survey of senior bank loan officers showed continued tightening of conditions into the 4^th quarter of last year.

• Stocks ended positively around most of the globe last week, led by a strength in the U.S. and China. However, bonds lost ground as longer-term interest rates ticked higher. Commodities ended slightly higher, driven by a rebound in crude oil and Middle East risks.

U.S. stocks saw continued gains last week, with the S&P 500 exceeding the milestone 5000 level. These tend to result in enhanced media attention on stocks, sometimes related to a ‘fear of missing out’ effect by investors. We are also reminded that, as stocks have tended to move upward over the long haul, new all-time highs are not necessarily cautionary signals.

Sector results were led by technology, up over 3%, followed by consumer discretionary, health care, and industrials. Defensive sectors consumer staples and utilities each lost over a percent on the week, with the latter likely along with higher interest rates. However, real estate saw minor gains for the week. From an earnings perspective, per FactSet, about two-thirds of firms in the S&P 500 have now reported results, with the blended year-over-year earnings gain now having improved to 2.9% (compared to a slight negative expectation at the start of earnings season).

Foreign stocks were mixed, with minimal gains in Europe and Japan offset by a decline in the U.K. As in the U.S., ECB members talked down the idea of early-year rate cuts, along with improving economic data, dampening sentiment somewhat. Emerging markets saw stronger gains, due to a rally in China. It appears that the Chinese government is putting together a market stabilization fund, which has been taken positively by investors, as markets prepare to close for a week in celebration of the Lunar New Year. While a bullish indicator for equity markets there, structural problems remain, notably in real estate, which will require more time and possible intervention. An ongoing curiosity has been the minimal government support up until this point, albeit there are a variety of possible stimulus targets. Price deflation has become more persistent as well, which is a mixed bag for consumers, as it tends to accompany slower growth. Discounted valuations reflect the myriad of concerns there.

Bonds lost ground for the week, along with yields rising across the U.S. Treasury curve, seemingly related to Fed Chair Powell’s earlier national TV interview comments hinting at no immediate rate cuts. The Treasury auction earlier in the week, of over $40 bil. in 10-year notes, saw greater demand than expected from investors, resulting in no offsetting spike in yields. Bucking the trend were high yield and floating rate bank loans, which saw minor gains. Foreign bonds were down, along with a stronger U.S. dollar.

Commodity group results included a gain in the energy sector, offset by a decline of a few percent in industrial metals. Crude oil rose 6% last week to $77/barrel, which appeared tied to Israel’s rejection of a ceasefire offer, and a re-escalation in Gaza military activity—the re-addition of some geopolitical risk premium that had fallen away in prior weeks. On the other hand, natural gas prices fell -10% (and down over -40% over the last three months), related to both weather and pressure to end the Biden administration’s gas exploration moratorium, which would have a positive impact on supply.

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. 

Economic Update 2-05-2024

• Economic data for the week included the Federal Reserve keeping interest rates unchanged, as expected. ISM manufacturing data improved, while the employment situation report for January came in far stronger than expected.

• Equities fared well in the U.S. especially, with continued better-than-expected earnings. Bonds gained as long-term yields fell back. Commodities overall declined, led by a lower risk premium in crude oil prices.

U.S. stocks were mixed until Wednesday, when the FOMC statement and post-meeting press conference alluded to lower chances of a March rate cut—contrary to market hopes for a sooner-than-later ease. Faster easing has been the growing narrative this year, despite continued strong economic data (and especially considering very strong labor data on Fri.).

At their late January meeting, the Federal Reserve Open Market Committee kept the Fed funds range unchanged at 5.25-5.50%, where it’s been since last July. There were no dissents, even as the voting membership evolved to a new group for the year.

The formal statement language was updated significantly. Economic growth was noted as still “expanding at a solid pace,” job gains remaining “strong,” with inflation having eased but remaining elevated. References to the U.S. banking system and tight financial conditions were removed, replaced by employment and inflation goals “moving into better balance.” References to further firming in policy were removed, which was significant. Most importantly (and negatively for market response afterward), the FOMC “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.”

Economic Update 1-22-2024

• For the holiday-shortened week, economic data included gains in retail sales, consumer sentiment, and homebuilder sentiment, while industrial production was little changed, and several housing metrics weakened. 

• Equities gained in the U.S. as earnings reports have started, while foreign stocks fell back. Bonds lost ground globally upon higher interest rates and a stronger dollar. Commodities were mixed, with little change in crude oil prices last week. 

Economic Update 1-16-2024

• Economic data for the week included consumer price inflation coming in a bit stronger than expected, but a slight improvement on a year-over-year basis compared to the prior month. On the other hand, producer price inflation came in a bit weaker than expected. 

• Equities saw gains in developed markets, while emerging markets declined, led by weakness in China. Bonds fared positively as yields pulled back along with eroding inflation worries. Commodities were mixed for the week, with gold higher and crude oil lower.