After the November/December rate rally that saw the 10-year Treasury drop from near 5.00% to 3.79%, 2024 started with a partial reversal as the 10-year spiked to 4.18% in mid-January. It seemed like markets had “gotten ahead of themselves” with the rally and some correction was in order. December’s PCE report showed strong consumer spending (up 0.7% in December), but the spending was not matched by income growth. Rising credit card balances and lower personal savings rates fueled the holiday splurge, implying it is ultimately unsustainable. Annual Core PCE showed a 2.9% increase, still above the Fed’s 2% target. The 3-month moving average is 1.5% annualized and the 6 month is 1.9%.
Yesterday’s Fed announcement left rates unchanged as expected, all the action is in the statement and Powell’s presser. The statement was simultaneously dovish (it removed language about the Fed’s willingness to keep raising rates) and tamping down expectations (no plans to cut rates with inflation running above the Fed’s target). The current data indicates that we might be there now, but the Fed is still haunted by the early 80s “whoops, we cut too soon and had to raise again” rollercoaster. So, Powell dutifully remarked that “rates are still too high” and that a March rate cut was not likely. Future markets adjusted and now indicate a 95% chance of a rate cut on May 1 (90 days from today but who is counting?). Powell indicated the Fed is “data dependent” and “meeting by meeting.” More semi dovish talk from Powell, “The committee intends to move carefully as we consider when to begin to dial back the restrictive stance that we have in place.”
This week’s data indicated that time is coming; higher jobless claims, higher worker productivity (employer wage dollars being stretched), lower ADP payroll growth, etc. These are signs of long awaited “labor slack” which is closely watched by the Fed. The 10-year Treasury has rallied from 4.13% to 3.85% this week. CMBS spreads are compressing as bond buyers return with fresh allocations and a bullish rate sentiment. All eyes will be on tomorrow’s January employment report. Will the “slack” continue? Stay tuned…
By David R. Pascale, Jr., Senior Vice President at George Smith Partners.
