Stock Market Nerd Macro – December 15, 2023
Fed Statement
Jerome Powell was more dovish in his statement and press conference this week than perhaps anyone hoped for. In the statement, the Fed described inflation as “easing” in what was the most positive language change we’ve seen in over a year. It added the word “any” to determine the extent of (any) additional targeting to hint at it being done with hikes. For more evidence, its mean 2024 rate projection plummeted from 5.1% to 4.6% (3.6% for 2025 vs. 3.9% previously; 2.9% for 2026 vs. 2.9% previously). 4.6% represents about 3 cuts expected for 2024.
Cut probabilities for March rose from 40% to 60% as a result. The Fed is seeing faster disinflationary progress than it expected, but again, with more progress needed. Powell even called out cooling inflation in the stickiest non-housing services bucket. Policy was called “at or near its peak” with the potential for data surprises to change that view. Finally, longer-term inflation expectations remain well-anchored.
The labor market remains strong. Labor supply imbalance is still there but recovering with better labor force participation and higher rates of immigration. Wage inflation, as a result, is meaningfully cooling. It sees unemployment rising from 3.8% this year to 4.1% next year.
Taking all of this together keeps the elusive soft-landing outcome firmly on the table. It points to a Fed being able to pause and cut rates while the economy reasonably chugs along. Notably, it has no plans to slow down the pace of balance sheet shrinkage (quantitative tightening), which is its other tool for controlling inflation. That monetary supply headwind will eventually fade likely at some point next year.
Economic growth considerably slowed from Q3 vs. Q4. GDP for 2024 is now expected to be 1.4%. Restrictive policy is weighing on fixed business investments, housing and other rate sensitive sectors.
While all of this is encouraging, stocks still won’t go up in a straight line. They never do, and this time won’t be different. The Fed will work to hawkishly jawbone to keep excitement in check. Non-voting member Bostic did that yesterday when we called for 2 rate cuts in 2024 over 2023. Regardless of this sentiment, we are clearly closer to the end of this hiking cycle and the end of speculative growth assets endlessly and aggressively cratering. The “brighter days ahead” seem to be arriving.
Macro Data
Inflation Data
- Consumer Price Index (CPI) Y/Y for November rose 3.1% as expected and vs. 3.2% last month.
- CPI M/M for November rose 0.1% vs. 0.0% expected and 0.0% last month.
- Core CPI Y/Y for November rose 4% as expected and vs. 4% last month.
- Core CPI M/M for November rose 0.3% as expected and vs. 0.2% last month.
- Producer Price Index (PPI) M/M for November rose 0% vs. 0.1% expected and -0.4% last month.
- Core PPI M/M for November rose 0% vs. 0.2% expected and 0% last month.
- Consumer inflation expectations fell from 3.6% to 3.4%.
- 3, 10 and 30 year note and bond auctions all closed at rates lower than previous auctions. 4.49% for 3-year, 4.296% for 10-year and 4.334% for 30-year.
Consumer and Employment Data
- Retail Sales M/M for November rose 0.3% vs. -0.1% expected and -0.2% last month.
- Core Retail Sales M/M for November rose 0.2% vs. -0.1% expected and 0% last month.
- Initial Jobless Claims rose 202,000 vs. 220,000 expected and 221,000 last report.
Output Data
- Atlanta Fed GDPNow reading for Q4 jumped from 1.2% to 2.6%.
- New York Empire State Manufacturing Index for December was -14.5 vs. 2 expected and 9.1 last month.
- Industrial Production M/M for November rose 0.2% vs. 0.3% expected and -0.9% last month.
- Manufacturing Purchasing Managers Index for December was 48.2 vs. 49.3 expected and 49.4 last month.
- Services PMI for December was 51.3 vs. 50.6 expected and 50.8 last month.
