LSA Connect

Economic Update 1-8-2024

• In the first week of the new year, economic data continued to show a mixed picture. ISM manufacturing continued to contract, but did improve, while ISM services grew, but at a far slower pace. The monthly employment report for December showed gains far stronger than expected. 

• Equities fell back globally to begin the year, resulting from geopolitical tensions and signs the Fed may not cut rates as dramatically and as quickly as hoped. Bonds lost ground, as yields ticked higher, and foreign bonds were hampered by a stronger dollar. Commodities were mixed, with oil up and metals down. 

Economic Update 1-2-2024

• In a holiday-shortened week, economic data was light, consisting of increases in home prices from the fall, while jobless claims continued to be little changed. 

• Global equities saw gains to close out the year, with emerging markets outperforming developed. Bonds saw minor gains as interest rates were stable to lower. Commodities fell back, largely due to continued weakness in crude oil. 

Economic Update 12-18-2023 

• Economic data for the week included the Federal Reserve keeping interest rates unchanged, while alluding to easing policy at a further pace than first expected in 2024. Both producer and consumer inflation showed continued signs of some further deceleration. Industrial production and retail sales showed gains, although trends for the latter remain less robust after correcting for inflation. 

• U.S. equities gained with optimism of the U.S. Fed hinting at easier policy, while a weaker dollar buoyed foreign stocks higher. Bonds earned positive returns along with a drop in interest rates. Commodities gained on net, led by metals and energy. 

U.S. stocks experienced gains for the seventh straight week as investors cheered the Federal Reserve’s dot plot, released after the meeting, which alluded to no additional expected rate hikes in addition to four cuts in 2024. This helped reinforce the soft landing case that financial markets had been hoping for, as well as potential for a ‘regime shift’ from tightening to easing. Producer prices also came in lower than expected, improving the case for inflation generally decelerating. 

At the December meeting, the Federal Reserve Open Market Committee held the Fed funds rate steady at 5.25-5.50%, where it’s stood since July. There were no dissents. 

The formal statement was minimally changed with a notation that economic growth ‘has slowed’ from its strong pace in the third quarter, and that inflation ‘has eased over the past year’ while remaining elevated. The word ‘any’ was inserted prior to the potential for additional policy firming, which appears minimal, but appears a clue to the reduced chances of future hikes. The Fed’s Summary of Economic Projections document showed a lower path of Fed funds by several tenths each in 2023 (5.4%), 2024 (4.6%), 2025 (3.6%), while 2026 was held steady at 2.9%, as was the longer-run path at 2.5%. 

Part of the rationale for holding rates steady at recent meetings has been the ‘tightening’ effect of rising long-term yields. But, since late October, the 10-year U.S. Treasury yield has fallen from 5.0% at its peak down to as low as 4.1%, along with some falling inflation data and policy expectations. Just as high and rising long-term rates do some of the Fed’s work in tightening policy, falling yields work against it by effectively ‘easing’ conditions. 

Economic Update 12-11-2023 

• Economic data for the week included the employment situation report that continued to show labor market strength, and gains in ISM services, while job openings fell back. 

• Global equities were mixed last week, with minor gains in the U.S., mixed results in the rest of the developed world, and a net decline in emerging markets. Bonds were little changed as well, as interest rates stabilized at lower levels. Commodities lost ground in several groups, with the headwind of a stronger U.S. dollar. 

U.S. stocks earned small gains last week. Early in the week, stock sentiment turned negative as doubts that the Fed would cut rates sooner than later began to sink in, with some consternation about how the Friday employment situation report for November would turn out (the result was slower, but not weak job growth), while consumer sentiment sharply improved. Small cap stocks outperformed large caps, along with lessened interest rate fears. 

Economic Update 12-04-2023 

• Economic data for the week included Q3 GDP being revised slightly higher, while PCE inflation continued to decelerate. Manufacturing data remained contractionary on net, and new and pending home sales fell back. 

• Stocks gained globally as falling inflation and central banker comments led to hopes for lower interest rates next year. Bonds fared especially well, due to a drop in long-term rates leading to a strong duration effect. Commodities were mixed to down, with higher gold prices offset by weaker crude oil, despite OPEC+ production cuts. 

U.S. stocks fared positively to end November. In fact, the month’s S&P total return of 9.1% was the best single month in over a year. Positive sentiment was related to slower PCE inflation reading during the week, showing further deceleration in prices. More so, this was tied to some optimistic comments from Fed board member Waller, who has been seen as hawkish up until now, having updated his view of inflation ultimately getting back to 2% with current policy, and better chances of even ‘lowering the policy rate’ over the next 3-5 months. Markets jumped on the news, as this provided some hope for even more substantial rate cuts next year. However, before this exuberance got too out of hand, Chair Powell attempted to quash these dovish expectations, hinting at the still-possible chance of rate hikes ‘if’ data demands it. Seemingly now that probabilities are high that we’re at ‘peak’ Fed funds rate, the question of year-end has turned to rate cuts. 

Economic Update 11-27-2023 

• In a holiday-shortened week, economic data included the index of leading economic indicators continuing their slide downward over the past half-year. Durable goods orders also declined, as did existing home sales. On the positive side, jobless claims fell back. 

• Equities were slightly higher last week, on light volume in the U.S. and few dramatic data releases. Bonds were mixed as interest rates ticked slightly higher, but spirits were boosted by a decent auction for long-term U.S. Treasuries. Commodities were also mixed with gains in metals offset by a slight drop in oil prices. 

Economic Update 11-20-2023 

• Economic data for the week included producer and consumer inflation readings decelerating far faster than expected, boosting the mood of financial markets. Manufacturing releases were mixed, as was housing data, while retail sales fell back a bit. 

• Global equities saw gains as consumer price inflation eased, leading to lower interest rates. Bonds gained accordingly as well. Commodities were mixed, with gains in metals offset by a continued drop in crude oil as supplies stayed elevated. 

Economic Update 11-13-2023 

• In an oddly quiet week for economic data, consumer sentiment declined, jobless claims were little changed, while the Fed’s bank loan officer survey showed continued tighter standards. 

• Stocks were mixed globally with gains in the U.S. large cap group and a small increase in Europe offset by declines elsewhere due to mixed sentiment, mixed data, and disappointing central bank communications. Bonds generally declined as interest rates ticked back up. Commodities lost ground generally, led by a drop in crude oil prices with fewer geopolitical concerns. 

Economic Update 11-06-2023 

• Economic data for the week included the Federal Reserve holding interest rates steady, ISM manufacturing and services both showing declines, gains in home prices, while the employment situation report showed job positive gains, but at a weaker pace than expected. 

• Equities rose globally as hopes of central bank peak rates looked increasingly likely, and acceptable (not too good or too soft) U.S. economic data. Bonds fared positively as interest rates declined sharply following the FOMC meeting. Commodities were mixed, with crude oil prices pulling back. 

U.S. stocks experienced sharp gains last week, in fact the best week of 2023 thus far. Early week results were strong with news of a tentative agreement between the United Auto Workers and GM. The somewhat dovish comments from the FOMC after their policy meeting mid-week also appeared to strongly propel sentiment for several days, as chances for a December hike appear to remain low. Friday’s weaker jobs report also provided some reassurance that labor markets might be cooling, also lessening the chances of further tightening needs. There appeared to be high volume from larger firms as well, including tax loss trades before the common Oct. 31 fiscal year end. 

The Federal Reserve Open Market Committee kept the Fed funds rate unchanged today at 5.25-5.50%. The vote was unanimous. The formal statement wording was minimally changed, but with more important underlying meaning. Economic activity was upgraded from ‘solid’ to ‘strong,’ while the comment about job gains changed from ‘slowed’ to ‘moderated.’ On the other hand, a reference to ‘tighter credit conditions’ was updated to ‘tighter financial and credit conditions.’ 

Based on CME Fed funds futures¹ just before the meeting, there was about a 99% chance of no change, reinforced by hints from several Fed members in recent weeks. (Interestingly, a 3% chance for a quarter-point rate cut appeared earlier in the week—the first time in a while.) Commentary from other members has been a bit more hawkish, pointing to continued concern over high inflation and surprise at the strength of economy and labor markets—leading to futures pricing a ~25% chance of a hike in December. After estimates earlier in the year calling for a dramatic decline in the Fed funds rate in 2024, expectations have become more restrained. Consensus guesses point to highest odds of a -0.25% cut by June, with the likeliest odds at about 4.50-4.75% by December. This points to today’s levels being very near peak rates. 

Economy. U.S. economic growth for Q3 came in at 4.9%², far stronger than expected versus Q2, driven by still-robust consumer spending. Albeit not precise, some measures show consumer savings draining, leading to lower expectations for future quarters. Based on the Atlanta Fed’s GDPNow measure³, an early estimate for Q4 growth has dropped from an initial 2.3% to 1.2%, with the Blue Chip economist median estimate just under 1.0%. Among private sector economists, expectations for 2024 have settled in a fairly wide range of 1.0-2.0% range, which isn’t far from the level of longer-term trend growth, based on demographics/labor force change and assumed productivity. All else equal, slowing growth would pressure interest rates eventually downward. 

Economic Update 10-30-2023 

• Economic data for the week included U.S. GDP growth for Q3 coming in over double that of the prior quarter. Durable goods orders also came better than expectations. In housing, new home and pending home sales both exceeded estimates. 

• Equities fell back as several growth metrics led investors to assume continued higher interest rate policy. Bonds fared positively as yields actually fell back. Commodities were mixed with a small decline in crude oil offset by a spike in natural gas.