Trade The Journey

Trade The Journey

Fed keeps Rate Cut Projections, Markets Rise!

Good Afternoon, Traders! I hope you’re all enjoying your weekend and getting ready for the upcoming week. Thursday marked the beginning of March Madness, with the games delivering solid entertainment so far. The first round mostly showcased mismatches, though there were some surprising upsets. This week, the market received long-awaited news: no changes to the rate cut outlook. The Fed has maintained the rate at 5.25-5.50%, with further details on dot-plot and projections to follow. Rates are expected to stay at these levels by the May meeting, with an 87.7% probability. However, the June meeting is anticipated to bring the first rate cut, with a 66.7% chance of a twenty-five-basis point reduction. For July, a cut between twenty-five to fifty basis points is anticipated.

Most developed economies predict rate cuts this year, with Switzerland leading as the first major economy to implement a cut. This development was overshadowed by Japan’s central bank’s decision to increase rates for the first time in seventeen years. For years, Japan maintained negative rates, effectively charging banks to hold accounts with the central bank, aiming to encourage lending as the economy struggled post-90s asset bubble.

Japan has also ended its yield curve control and is considering reducing its ETF purchases. The yield curve control policy, previously capped at 1%, has been removed, though bond purchases will continue. The Bank of Japan holds an estimated $248 billion in ETFs. Factors influencing this policy shift include inflation nearing its target and a significant rise in average pay, based on union agreements, marking a 30-year high.

While the BOJ has not announced further hikes, continued rate normalization seems likely, though it has led to the yen’s decline. The yen is nearing a low against the dollar, approaching the $151.93 level.

Last week, China left short-term rates unchanged, continuing to monitor for recovery signs. Retail sales fell by 1.9% to 5.5% over the last year, though there was a rebound in home appliances and building materials sales. Fixed asset investment exceeded expectations with a 4.2% increase, despite a sharp decline in primary sector investment.

Additionally, real estate investment saw a less rapid contraction. Foreign direct investment dropped by over 19.9% this past year, continuing a downtrend since June 2023. In the Euro area, rates are aligning with the ECB’s mandate, with decreases in both CPI and core CPI over the last year. There’s been a noticeable reduction in labor cost and wage growth.

Construction output declined significantly over the past year. However, the Euro area’s composite PMI flash increased several points, despite drops in manufacturing and services PMI. Central bank officials’ comments suggest a rate cut is more likely in June.

Upcoming Week

Monday: New home sales, Dallas Fed manufacturing

Tuesday: Durable goods, house price index, Richmond Fed manufacturing.

Wednesday:  MBA weekly index

Thursday: GDP Final estimate, initial claims, Pending home sales, University of Michigan- consumer sentiment Final

Friday: PCE Index, Retail/wholesale inventories

Economic Insights

Data was scarce, with the Fed minutes capturing the market’s attention due to uncertainties around monetary rates. The Fed held rates steady at 5.25%-5.50%, as the likelihood of a cut had decreased from earlier predictions. Both CPI and PPI unexpectedly rose in January and February. Chairman Powell stated a rate cut is forthcoming but will depend on data. The Fed has highlighted that the path to lower inflation will have bumps.

Optimistically, committee members predict faster-than-expected GDP growth as the labor market improves. The unemployment rate is anticipated to be 4% this year and 4.1% next year. PCE inflation is expected to decrease to 2.4% by year-end, 2.5% next year, and 2% by 2026. Inflation in housing services is also expected to reduce over time. The balance sheet runoff, having already decreased by nearly $1.5 trillion, is set to continue cautiously.

Risks are dual-sided; easing too quickly could reignite inflation, while delaying could damage employment and people’s well-being. A weakening labor market significantly influences rate reduction timing. Here is a segment from Chairman Powell’s speech regarding the job market balance:

Yeah, so if what we’re getting is a lot of supply and a lot of demand, and that supply is actually feeding the demand, because workers are getting paid and they’re spending and that’s– what you would have is potentially kind of what you had last year, which is a bigger economy where inflationary pressures are not increasing. In fact, they were decreasing so you can have that if you have a continued supply side activity that we had last year with, both with supply chains and also with growth in the size of the labor force.

The Federal Reserve anticipates that reserve supplies will stabilize at or near zero, leading to a decline in reserves. Close monitoring by the Fed aims to prevent any liquidity crises like those experienced in the past. Additionally, the Fed is keeping an eye on money market conditions as a way to gauge when it might be appropriate to conclude its quantitative tightening efforts.

Overall, it was a good press conference for markets and in turn they rallied to new highs. The rise in the S&P 500 is still centered around a few sectors but is broadening out. Sectors over their 50-SMA seem to be rising. Yields retreated on the news that rate cut projections remained unchanged.

The two-year yield rose to 4.541%, the ten-year to 4.341%, and thirty-year yield to 4.278%. Yields returned to the previous ranges before the week of the Fed meeting, remaining inverted. The 10-year TIPS rate which is all the true cost of loan declined from just over 2% to 1.859%.

Usually, the dollar would turn as yields turned but the dollar ended the week recovering to $104.77, edging higer than the recent pivot high of $104.507. Other currencies declined against the dollar, helping to propel its rise. Crude declined to the $80 level and gold fell from its highs as the dollar rose.

Most of the data released this past week concerned the housing market.

New Residential construction showed that building permits rose 2.4% in February.  Housing starts rose 5.9%, and housing completions rose 9.6%. Single-family permits rose 1%, housing starts rose 11.6%, and housing completions rose 20.2%.

Multi-family permits were mixed with two to four units growing 18.4% while five units or more rose just 2.4%. Multi-family starts rose 8.6%, while units completed rose 20.8%. Units under construction for both single and multi-family were mixed, rising 0.3% for single units and falling 1% for five units or more.

Existing home sales rose sharply in February, increasing by 9.6%, beating forecasts.  Total housing inventories rose 5.9% as unsold inventory at the current sales pace declined to a 2.9-month supply. The median-existing home price was $384,500 as each region saw home prices rise. Existing home sales rise revisited prior levels not seen for several months.

The weekly MBA report showed that application volume fell 1.6% from the week prior. The refinance index declined 3% and the purchase index fell by 1%. The average rate for a thirty-year fixed confirming loan rose fifteen basis points to 6.97%. The average rate for a thirty-year fixed jumbo loan rose ten basis points to 7.14%. Rates will probably return to previous level after the recent press conference and dot plot.

Regional manufacturing conditions improved with the Philly Manufacturing outlook improving. General activity remains in positive territory but edged lower, while shipments rose, and new orders improved. The employment index contracted, but the price index fell signaling that inflation is trending lower. Future activity rose sharply, with half of the firms expecting activity to improve. New orders and shipments both are expected to rise sharply as is future employment. Future capital expenditures are forecasted to increase, registering their highest level since two years ago.

Initial claims fell slightly, registering 210,000 claims this past week, below expectations of 215,000. Continuing claims were virtually unchanged at 1.807 million.  The four-week moving average rose by 2,500 claims to 211,500. Both initial and continuing claims have remained in a range indicating the strength of the labor market and possibly extending the timeline of a possible rate cut.

Technical Story:

This Past Week’s cash flow management review:

My cash flow has been improving because I’ve cut back on my expenses. While I haven’t started to replenish my savings yet, I’ve made consistent progress in reducing my credit card debt. My primary focus is on lowering my credit card balances to decrease my monthly expenses, and I’ve been successful in this effort so far.

Grade: C+

Reason: Some improvement

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