Macro Market Notes Digest - January 2024

Welcome to the January digest of posts published on Macro Market Notes in 2024! I do publish summaries of the blog posts on LinkedIn or Twitter right after I publish a post, but this newsletter is another way to keep informed about my publications on Macro Market Notes or elsewhere.

In January I wrote about the December jobs report, what the latest data tells us about wage growth and inflation expectations, the state of consumption, excess savings and core PCE inflation in December, and the January FOMC decision.

If you have feedback on any of the pieces outlined below or if you want to chat about a particular topic or want to discuss opportunities, let me know in the comments or message me.

The Monthly Digest

Dec Payrolls: Another Month, Another Sturdy Jobs Report (January 5th)

A summary of this post was featured on LinkedIn News: Hiring Jumped in December: LinkedIn

Key takeaways:

• Payrolls growth momentum remains firm and continues to run above the breakeven pace needed to keep the unemployment rate constant.
• After slowing earlier in the year, the job-finding rate has been moving up since the summer.
• Job-finding odds will likely improve further as the size of the labor force shrank and can be expected to grow more moderately going forward.
• Wage growth firmed and outpaced the medium-run rate that is consistent with 2% inflation.
• Combined with an expected year-ahead real interest rate that has passed its peak, today’s data means the Fed will be in no hurry to cut rates.

Wages and Inflation Expectations - January 2024 Update (January 19th)

A summary of this post was featured on LinkedIn News: Consumers feeling more optimistic

Key takeaways:

• Between July and October “Main Street” inflation expectations had been stuck around a 3.2% PCE inflation equivalent rate, but since November they eased notably below 3% with a preliminary reading for January of a 2.6% PCE equivalent rate.
• Consequently, trend wage growth based on these inflation expectations (W*) continued to ease, suggesting that there is potentially additional wage disinflation in the pipeline.
• With W* consistent with about 2.6% PCE inflation, this wage growth trend measure is closing in on the Fed’s 2% inflation target. But any actual wage growth easing in line with this measure will still keep wage growth at an above-target pace.
• Wage growth measures were relatively stable in December and corrected for expected inflation, trend productivity growth and trend labor share growth, these continue to boost households’ real incomes and spending.

Dec Personal Income & Outlays: Carry On Spending (January 26th)

Key takeaways:

• Personal income growth out of wages and salaries remains strong in December and it outpaces the growth rate that is consistent with 2% PCE inflation over the medium-term.
• The stock of excess savings has NOT run out and continues to be a tailwind for consumption. Between November and December, it fell around $39 billion and equaled about $593 billion in December.
• Real PCE growth continues to show a strong momentum, with the underlying (trimmed mean) growth rate outpacing the headline rate at an accelerated pace in December. This suggests that consumption will remain strong in 2024 Q1.
• Core services excl. housing PCE inflation, the Fed’s favorite gauge of underlying inflation, remains at elevated levels on a year/year basis but has continued to slow on a three- and six-month basis.
• Despite slowing momentum in non-housing core services inflation, strong wage income growth and real spending will mean the Fed remains wary of starting to cut rates too early in 2024.

Jan FOMC Meeting: Prepping for Rate Cuts (January 31st)

A summary of this post was featured on LinkedIn News: Fed stands pat on interest rates

Key takeaways:

• The FOMC decided to keep the Fed funds target rate unchanged at 5.25%-5.50%, and no longer signaled policy rate hiking bias going forward.
• Underlying core services inflation and near-term “Main Street” inflation expectations have shown further signs of downward momentum.
• But the labor market and consumption spending remain relatively strong.
• Since the September FOMC meeting, expected near-term real interest rates have peaked and eased somewhat, with the perceived policy stance just a notch below the Fed’s own assessment of its stance.
• As the expected year-ahead real rate path remains contained and real economic activity levels remain strong, the FOMC will likely be patient in assessing more progress in both spot inflation and inflation expectations data as well as labor market trends before deciding to cut policy rates.
• My modal view is for Fed funds rate cuts likely not to start until mid-2024. There is, however, a risk cuts could commence in March owing to a combination of the Fed overestimating the restrictiveness of its current policy rate level and continued rapid disinflation pace in the spot inflation data over the next few months.

Final Thoughts

Going into 2024 the U.S. economy can be typified along three parts:

• The labor market remains solid and wage growth, while easing, remains elevated at an above-inflation target pace.
• The consumer remains buoyant owing to continued good labor market prospects and wages with households still having a lot of cash on hand (a.k.a. excess savings) that allows them to whether any headwinds.
• Inflation as well as near-term inflation expectations of firms and household are showing signs of slowing.

Against this economic background, the Fed thus needs to assess whether the recently observed disinflation is transitory or whether it will stick. As expected real rates are not trending up further, the Fed will be patient in assessing the data before starting a Fed funds rate cutting cycle.

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