Week of April 29, 2024 Recap
Fed…
Prior December the Fed stance has been cuts/disinflation with comments saying that the current level of policy most likely the high for this cycle. Now that has shifted to hike “unlikely” as the next move. I think the probability of a hike has increased, albeit low.
At the same time, he said, for officials to put hikes back on the table, they would need persuasive evidence that higher interest rates weren’t bringing down inflation. “That’s not what we think we’re seeing,” Powell said. “That will be a question that the data will have to answer.”
“It’s likely to take longer for us to gain confidence that we are on a sustainable path” to lower inflation, Powell said. He said he expected inflation would resume its decline this year, but added, “my confidence in that is lower than it was.”
Powell mentions if one mandate deviates further from target, they will focus on it (inflation post pandemic) but as it reverts back to more normal levels, they will definitely focus on the other mandate employment. So this kind of is inline with my thinking which is that markets reaction function is no longer rates only but also economic growth and employment.
News Flow…
NFP: added 175k jobs, estimates at 240k. Revisions were lower (20k for both March and Feb). Uneployment rate at +3.9%, above streets estimate of +3.8%.
With roughly 60% of S&P 500 earnings reported, EPS is tracking 5% ahead of consensus (excluding Bristol-Meyers Squibb’s acquisition costs). EPS and sales beats are better than average with Tech and Magnificent 7 leading the charge (+10% vs. estimates)
The FED meeting this week along with price action around economic released have changed my views towards rate cut scenarios. This change is subtle but nevertheless probabilities have adjusted along with the factors influencing the market.
While Powell reinforces the fact that it would take longer than expected to “gain confidence” to cut rates, he has also introduced a possibility (small) that hikes are still in play. More specifically, when asked about rate hike, he mentioned “unlikely.” In prior public appearances, he has stressed more than once that current rate is the high for the current cycle. While I don’t think we are in an environment where hike is justified, I think the FED has become MORE neutral on policy as opposed to dovishly oriented.
I want to stress that I do agree that we’ve made progress in fighting inflation and that this last mile is going to be hard. There are tiny pockets of the economy where interest rate alone wont be able to further create disinflation. I don’t know what the FED specifically can do to address this per se, but I think over time with slower growth and demand, we will see prices normalize further. This brings in nicely to my next topic which is the actual health of the economy.
The current earning season is looking decent. As mentioned above, with 60%+ of firms reporting, we are seeing 5% beat on estimates. Corporate America is doing fine. What I think will take the limelight away from inflation going forward is actually the potential for a decline in economic activity. We’ve gotten hints from that from this week’s Job’s report.
The FED’s other mandate of keeping unemployment low will start to be in focus, mainly driven by the extended economy. In the recent FED presser, Powell mentions that rate cut may be on the table IF we see more deterioration in the labor market. This very fact he mentioned this shows he isn’t focused entirely on inflation. If inflation stays where its at and labor market worsens, he will most definitely cut rates. I think the markets reaction function will slowly adjust to this where bad economic is good for stocks. Instead we will see bad economic data may very well be actually bad for stocks. Let see how this plays out.