Over the past couple of months – I’ve been trying to reconcile the following: (i) can the market achieve 12% EPS growth; and in parallel; (ii) see the Fed cut rates 5 or 6 times this year? I ask this question as that’s what the market is pricing in. It feels like a contradiction. Can we achieve both? For example, if the Fed is forced to cut rates aggressively – what does that tell us about the health of the economy? I would assume it signals an economy in need of emergency assistance.
"Interest Rates / Bonds"
Market Confident on Imminent Rate Cuts Despite Inflation Print
Today we received the final monthly inflation report for 2023 – ahead of the Fed’s next policy meeting Jan 30-31. Markets were expecting very good news… but did they get it? On the surface, both prints were slightly higher than expected. However, we saw a mostly muted reaction in both bond and equity markets. Bond yields fell – with the market maintaining its 68% expectation of a rate cut as early as March.
What Just Happened?
Only two weeks ago Fed Chair Powell said “the FOMC are not thinking about rate cuts”. And it was premature to conclude with confidence they are at a sufficiently restrictive level. Well forget all that. Powell performed one of the more remarkable pivots ever seen from the Fed. He pivoted 180 degrees from his sentiment barely 14 days ago. Powell is now talking three rate cuts next year and the Fed have essentially “won the battle” over inflation. My take is the Fed is now more concerned about the business cycle; i.e., recession. There is a reason the Fed will cut – and that is the risk of dislocation in the economy (i.e., recession)
Why Would the Fed Cut?
Last week the market received what it interpreted as a ‘goldilocks’ jobs number. Not too hot. Not too cold. But just right. Non-farm payrolls (NFP) increased by 199,000 in November, according to the BLS. This was around 19,000 higher than market expectations – however not hot enough for the Fed to raise rates this week. As an aside, the Government added 49K jobs as part of the 199K (inline with their monthly average). The unemployment rate, meanwhile, fell to 3.7% from 3.9%, marking the longest stretch of unemployment below 4% since the 1970s. That’s essentially a full employment picture. So here’s my question – why would the Fed consider cuts at full employment?
For a full list of posts from 2017…