Economic Update 4-15-2024

• Economic news for the week was dominated by inflation, for which consumer prices disappointed by remaining sticky on the services side, while producer price inflation came in far cooler. Consumer sentiment fell back a bit.
• Global equities fell back with the negative influences of higher U.S. inflation and increased risk of conflict in the Middle East. Bond prices also declined as yields rose, along with the inflation report and assumed impact on the Fed. Commodities were mixed, with energy down and precious metals up.

U.S. stocks suffered a down week largely due to persistent inflation pressures, as well as some escalating fears of conflict in the Middle East, with reports of a planned retaliatory Iranian attack on Israel (which occurred over the weekend, albeit being mostly neutralized). The drawdown on Wed. of over a percent was solely led by the CPI inflation number coming in ‘hotter’ than expected, disappointing markets that saw this as a sign that rate cuts might not begin in June as is the current base case, or that there might be fewer cuts this year (three being the base case). Friday’s poor showing was tied to weakness for some big banks (due to lower interest margins, particularly coupled with negative comments from JPMorgan’s management, particularly about inflation) that started off the Q1 reporting season. By sector, financials fared the worst, down nearly -4%, followed by declines of around -3% in materials and health care. Technology fared best, only suffering a minimal decline. Real estate also lost nearly -3% for the week, due to rising yields.

Economic Update 4-08-2024

• Economic data for the week included ISM manufacturing improving into expansion, while ISM services/non-manufacturing slowed a bit, but remained in expansion as well. Nonfarm payrolls came in stronger than expected again, while job openings data has steadily flattened.
• Equities fell back in the U.S. and most of the developed world, while emerging markets saw small gains. Bonds generally fell back as yields rose. Commodities fared well across the board, with strong gains in both energy and metals.

U.S. stocks fell back last week, seeing more volatility than in the recent few months. By sector, energy stocks rose 4%, followed by communications up over a percent. The majority of other sectors lost ground, oddly led by normally defensive health care and consumer staples, down up to -3% each, with the former reacting to Medicare rates unchanged from the initial estimate. Real estate also fell -3%, hampered by higher long-term interest rates.

Economic Update 4-01-2024

• On a week shortened by the Good Friday holiday, economic data included the final U.S. GDP growth number for the 4^thquarter being revised slightly higher. Recent monthly data included gains in durable goods orders, and mixed house price and home sales data, as well as mixed results in consumer confidence.
• Equities fared positively around the world last week, with some economic improvements abroad and continued hopes for rate cuts mid-year. Bonds fared decently with a small decline in yields. Commodities saw gains, primarily in crude oil and gold.

U.S. stocks continued their run of positive weeks, with the S&P 500 again reaching record highs. However, breadth has improved, with outperformance from the equal-weight version of the index and small caps outperforming mega-caps. Value and more defensive parts of the market led, with the largest gains spread between utilities, energy, financials, and healthcare—all near or over 2%. Technology was one of only two sectors with negative returns for the week, down over a percent. Real estate saw gains of over 2% for the week as well.

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.

The Fed’s quarterly Summary of Economic Projections (SEP) included the ‘dot plot’—a chart that features committee member opinions of future Fed funds rates. One question has been whether the long-term neutral rate estimate would rise from its long-standing 2.5% level, reflecting more persistent inflation, larger fiscal deficits and debt, and perhaps the Fed’s reaction with a higher neutral rate level. Compared to December, the expected Fed funds rate was unchanged at 4.6% for 2024, up 0.3% to 3.9% in 2025, up 0.2% to 3.1% in 2026, and the long-term rate up a tenth to 2.6%. Though seemingly small changes, they represent an evolution in the thinking of the Fed about the prospects for long-term inflation and their ability to control it.

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.

U.S. stocks were mixed last week, with little change in large caps and declines for small caps. Tuesday’s CPI release didn’t provide the hoped-for sharper deceleration, but didn’t deteriorate further, which may have provided some relief, although interest rates continued to rise on an expected longer runway for the current Fed policy pause. Friday was a triple-witching day, which happens four times a year, featuring a compilation of option expirations and typically enhancing volatility. By sector, energy rose nearly 4% followed by materials, while consumer discretionary fell back about a percent. Real estate also declined by nearly -3%, being sensitive to rising yields during the week.

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 3-05-2024

• Economic data for the week included a minimal revision downward for 4^thquarter U.S. GDP growth, strong personal income results and continued decelerating PCE inflation, stronger home prices and new home sales, but weaker durable goods orders and ISM manufacturing data.
• Global equities saw gains, led by continued strength in the U.S., with sentiment prompted higher by restrained inflation. Bonds fared well for the same reasons which produced falling yields. Commodities gained as well, led by energy supply considerations.

U.S. stocks continued a trend of gains last week, with small caps outgaining large caps. ‘Growth’ again outperformed ‘value,’ with optimism over artificial intelligence continuing to drive near-term sentiment. By sector, technology and consumer discretionary each gained over 2%, followed by increases in energy and materials. By contrast, defensives health care, utilities, and consumer staples lost ground. Real estate also rose several percent along with falling yields.

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.

U.S. stocks saw gains again last week, led by a Thursday rally driven by stronger-than-expected earnings, product demand, and forward-looking commentary from Nvidia, which continued to defy already high expectations. The focus is on artificial intelligence, and specialized chips leading the effort, buoying the entire stock market on promises of enhanced productivity.

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^thquarter 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).

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.).

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. 

U.S. stocks fell back early in the week as Fed governor Waller’s comments and strong retail sales pointed to a path of interest rates remaining higher for longer than the dovish sentiment of late 2023; however, they recovered by week’s end to a new record high for the S&P 500. By sector, technology led with a 4% gain, along with strong semiconductor sentiment related to artificial intelligence projects (including Taiwan Semiconductor—granted an emerging markets stock), while energy and utilities each fell back by over -3%. Real estate declined -2% with interest rates rising a bit on the 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. 

U.S. stocks saw gains last week, with inflation results seeing mixed sentiment on the consumer side, while producer prices were a positive sign. Sector results were led by technology and communications up 3-5%, while energy and utilities lagged with negative returns of -2%. Real estate gained slightly along with a drop in interest rates.  

Earnings season for Q4 began last week, with the big banks reporting first, as usual. It’s expected that some of Q3’s earnings strength was pulled forward and will dampen Q4 results. Per FactSet, Q4 S&P 500 year-over-year earnings growth is expected to come in at -0.1%; however, the last several quarters have seen an improvement of several percent as earnings season progressed, with downcast expectations having been exceeded. For Q4, the strongest sectors are expected to be communications, utilities, and consumer discretionary, with earnings growth of 20-40%, with energy and materials lagging, with earnings of -20% to -30%. Revenue is expected to run at about a 3% growth rate, led by 6% gains in real estate, technology, and communications. For the full year 2023, earnings growth is expected to be barely positive at 0.5%, well below average, although hopes for Q1 2024 remain near average (at 6%), and full year 2024 up near 12%. Full year estimates don’t provide much clarity about the impact on earnings from recession expectations, though, which could include a positive path throughout the year, or a dip and later recovery, as has been the case in the past. Very early earnings growth estimates for 2025 show an even better rate of 13%. While some watchers view these as a bit optimistic, stock prices have tended to follow earnings over time (short-term sentiment and valuation impact aside), which creates a better story than some are predicting. 

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. 

U.S. stocks began the new year on a sour note, resulting in the first negative week in months. Largely, this was due to rising expectations for rate cuts happening soon perhaps being overdone. Since stocks have moved essentially straight up over the last few weeks, a bit of a pullback wouldn’t be too surprising, which occurred. By Friday, market sentiment pulled back again in response to the stronger-than-expected employment report, which some thought could lower the odds of the Fed cutting rates anytime soon. However, this was offset by an ISM services report coming in at the edge of expansion may have offset that somewhat. Economic data continues to come in showing mixed results, leaving investors without clear direction. 

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. 

U.S. stocks ended 2023 seeing gains for the ninth consecutive week, despite low holiday volume. By sector, defensives consumer staples, health care, and utilities led the way, each up around a percent. Energy stocks fell by over a percent, along with oil prices. Real estate also saw gains of nearly a percent, along with stable to lower interest rates. 

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.