As we started this year – I felt the market was getting ahead of itself. Not only was the tape approaching an overbought zone – it also assumed as many as six rate cuts (possibly seven) before the end of the year. What’s more – it also priced in that earnings per share (EPS) would grow 12% year on year. It felt like a contradiction. For e.g., either the economy was reeling and needed (emergency) rate cuts; or the economy is expanding strongly (supporting earnings growth)? Today Fed Chair Jay Powell pushed back on the former. Markets should not expect rate cuts as early as March… stocks didn’t like it.
"Interest Rates / Bonds"
Core PCE Softens – Giving the Fed Scope to Cut
If there’s one inflation indicator the Fed tracks more than any other – it’s Core PCE (personal consumption expenditures). The PCE price index looks at U.S. inflation by measuring changes in the cost of living for households. It tracks the prices of a basket of goods and services, each with different weightings, to reflect how much a typical household spends every month. Today we learned that Core PCE continues to soften – which is good news. Question is does this give the Fed further scope to cut rates sooner rather than later?
EPS Growth of 12% with 6 Rate Cuts? Really?
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.
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.
For a full list of posts from 2017…