Month-In-Review: January 2024

Growth accelerated into year-end with GDP rising 3.3%, well beyond expectations for a nearer 2% pace. Consumer activity also gained momentum moving into the start of the new year with monthly hiring surging past even the most optimistic forecasts, and prompting an above-trend pace of wage growth.? ?

Perpetuating the prospect of achieving a soft-landing, the better-than-expected showing in the latest economic data coupled with a painfully slow pace of disinflation also extends the timeline for an eventual reduction in rates.?Keeping rates steady for the fourth consecutive meeting in January, the Fed has been clear in its "patient" approach to eventual policy easing, still waiting for further improvement towards the Committee's goal of 2% price stability. ?

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Market Activity and Commodities

·?????? Equities – Stocks ended higher in the first month of 2024. Beginning at 4,769.83, the S&P 500 gained 1.6% in January, closing at 4,845.65 and marking the third consecutive monthly gain. Additionally, the Nasdaq increased 1.0% in January, closing at 15,164.01. The Dow, meanwhile, gained 1.2%, rising from 37,689.54 to 38,150.30 in the first month of the year.

·?????? Treasuries – Treasury yields were mixed in January after finishing lower in December. The 2-year Treasury yield ended January down 4bps at 4.21%. The 10-year Treasury yield, however, rose 3bps from 3.88% to 3.91%.

·?????? Oil & Gas????????????

o?? (Jan 31) – Oil prices rose in January, marking the first monthly gain since September as conflict escalated in the Middle East. Oil prices rose 5.9% for the month to close at $75.85 a barrel.

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National Growth and Outlook

• NFIB Small Business Optimism (Jan 9) – The NFIB Small Business Optimism Index rose from 90.6 to 91.9 in December, surpassing the expected increase to a reading of 91.0 and marking a five-month high.

·?????? Leading Index (Jan 22) – The Leading Index declined 0.1% in December, less than the 0.3% drop expected and following a 0.5% decrease in November.

·?????? GDP (Jan 25) – GDP rose 3.3% on an annualized basis in the preliminary Q4 report, well surpassing the 2.0% gain expected, albeit down from the 4.9% increase in Q3. For all of 2023, the U.S. economy accelerated at a 2.5% annualized pace, the most in two years. In the details of the report, personal consumption rose 2.8% in the preliminary Q4 report, following a 3.1% gain the quarter prior. Goods consumption, meanwhile, rose 3.8%, due to a 4.6% gain in durables consumption?and a 3.4% increase in nondurables consumption. Services consumption rose 2.4% in Q4, the largest increase in three quarters. Gross private investment, a gauge of business spending, on the other hand, gained 2.1%, marking the weakest rise in three quarters. Fixed investment increased 1.7% in the preliminary Q4 report following a 2.6% gain in Q3. Nonresidential investment, including office buildings and factories, rose 1.9%, due to a 3.2% rise in structures investment, a 2.1% gain in intellectual property investment, and a 1.0% increase in equipment investment in the preliminary Q4 report. Residential investment rose 1.1%, marking the second consecutive quarterly increase following nine consecutive quarters of decline. On the trade side, exports rose 6.3%, the largest quarterly gain since Q1 2023, and imports rose 1.9% following a 4.2% increase in Q3. Finally, government consumption rose 3.3%. Federal spending increased 2.5%, national defense spending rose 0.9%, and state and local spending gained 3.7% in the preliminary Q4 report.

·?????? Chicago Fed National Activity Index (Jan 25) – The Chicago Fed National Activity Index fell from +0.01, revised slightly lower from +0.03, to a reading of -0.15 in December, a two-month low. The Chicago Fed Index draws on 85 economic indicators; a reading below zero indicates below-trend growth in the national economy and a sign of easing pressures on future inflation. In December, 37 of the 85 monthly individual indicators made positive contributions, while 48 made negative contributions.

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Employment

• JOLTS (Jan 3) – The number of job openings according to JOLTS – the Job Openings and Labor Turnover Survey – declined from 8.85M, revised higher from 8.73M, to 8.79M in November, the lowest since March 2021. According to the median forecast, there were 8.82M job openings expected in November. (Jan 30) – The number of job openings according to JOLTS – the Job Openings and Labor Turnover Survey – unexpectedly rose from 8.93M, revised higher from 8.79M, to 9.03M in December, the most since September. According to the median forecast, the number of job openings were expected to decline to 8.75M in December.
• ADP Employment Change (Jan 4) – ADP reported that private-sector employment rose by 164k in December, surpassing the 125k increase expected and the largest gain since August.
• Jobless Claims (Jan 4) – Initial jobless declined 18k from 220k to 202k in the week ending December 30, the lowest since mid-October. The four-week average dropped from 213k to 208k. Continuing claims, meanwhile, or the total number of Americans claiming ongoing unemployment, slipped from 1.89M to 1.86M in the week ending December 23. (Jan 11) – Initial jobless claims unexpectedly fell 1k to 202k in the week ending January 6. According to the median forecast, jobless claims were expected to rise to 210k. The four-week average, meanwhile, remained steady at 208k. Continuing claims, or the total number of Americans claiming ongoing unemployment, declined from 1.9M to 1.8M in the week ending December 30.? (Jan 18) – Initial jobless claims unexpectedly fell 16k from 203k to 187k in the week ending January 13, the lowest since September 2022. The four-week average, meanwhile, fell from 208k to 203k. Continuing claims, or the total number of Americans claiming ongoing unemployment, also dropped, falling from 1.83M to 1.81M in the week ending January 6, the third consecutive week of decline and the lowest in nearly three months. (Jan 25) – Initial jobless claims rose 25k from 189k to 214k in the week ending January 20, a seven-week high. The four-week average, however, fell from 204k to 202k. Continuing claims, or the total number of Americans claiming ongoing unemployment benefits, increased from 1.81M to 1.83M in the week ending January 13.
• Nonfarm Payrolls (Jan 5) – Nonfarm payrolls rose by 216k in December, more than the 175k gain expected according to Bloomberg, and the strongest pace of job creation since September. The three-month average, however, declined from 180k to 165k. For the full year, U.S. employers added 2.7M jobs, a solid level of job creation, albeit down from the 4.8M jobs added in 2022 and the 7.3M jobs added in 2021 and following the pandemic plunge in 2020. Additionally, November payrolls were revised lower from a 199k gain to a 173k increase. With additional revisions to previous months, the?overall change in nonfarm payrolls (December data + net revisions) was 145k. Private payrolls rose by 164k in December following a 136k gain in November. Goods-producing payrolls increased by 22k, due to a 17k gain in construction payrolls and a 6k rise in manufacturing payrolls in December. Private service producing payrolls rose by 142k in December, up from a 106k gain in November. Education and health payrolls led the gain in December, rising 74k following a 109k increase the month prior. Leisure and hospitality payrolls rose 40k, information payrolls gained 14k, and financial payrolls increased by 2k in December. On the other hand, trade and transport payrolls were unchanged in December, despite a 17k gain in retail trade payrolls, and business services payrolls rose 13k, despite a 33k drop in temporary help payrolls. Additionally, government payrolls rose by 52k in December following a 37k gain in November.
• Participation Rate (Jan 5) – The labor force declined by 676k following a 404k rise in November. Thus, the participation rate unexpectedly fell three-tenths of a percentage point to 62.5% in December, a ten-month low and the largest monthly drop in nearly three years. According to the median forecast, the participation rate was expected to remain at 62.8%.
• Unemployment Rate (Jan 5) – Household employment fell by 683k in December following a 586k rise the month prior. Thus, the unemployment rate unexpectedly remained steady at 3.7% in December for the second consecutive month. According to the median forecast, the unemployment rate was expected to tick up to 3.8% at the end of last year. Meanwhile, December’s 3.7% unemployment rate marks the 22nd month below 4%, the longest stretch since the 1960s.
• Average Hourly Earnings (Jan 5) – Average hourly earnings rose 0.4% in December, a tenth of a percentage point more than expected and following a similar increase in November. Year-over-year, wages rose 4.1%, up from a 4.0% gain in November and a two-month high. According to the median forecast, annual wage growth was expected to rise 3.9% in the final month of 2023.
• Average Weekly Hours (Jan 5) – The average workweek ticked down from 34.4 to 34.3 hours in December.

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Consumer Activity and Confidence

• Vehicle Sales (Jan 3) – Total vehicle sales increased from 15.32m to a 15.83m unit pace in December, more than the expected gain to 15.50m and an eight-month high. Over the past 12 months, vehicle sales rose 16.8%, up from the 7.5% gain the month prior and the largest monthly increase since July.
• Consumer Credit (Jan 8) – Consumer credit surged by $23.8b in November, well surpassing the $8.6b gain expected and following a $5.8b gain in October.
• Retail Sales (Jan 17) – Retail sales rose 0.6% in December, surpassing the 0.4% rise expected and the largest monthly gain since September. Year-over-year, retail sales rose 5.6% in December, up from the 4.0% annual rise in November and the largest annual increase since January of last year. Car sales rose 1.1% in December following a 0.8 % increase the month prior, while gasoline stations sales slipped 1.3%, the third consecutive month of decline. Excluding autos, retail sales rose 0.4% in December and climbed 4.5% over the past 12 months. Excluding autos and gasoline, retail sales gained 0.6% and increased 5.8% year-over-year. Finally, excluding food, autos, building materials and gasoline station sales, control group sales rose 0.8% in December and 5.6% over the past 12 months. In the details of the report, non-store retailer sales climbed 1.5% in December, the largest monthly gain since July, and clothing sales also increased 1.5% in December. Also, general merchandise sales rose 1.3%, due to a 3.0% gain in department store sales, the first monthly increase following three consecutive months of decline. Additionally, miscellaneous sales rose 0.7%, building materials sales increased 0.4%, sporting goods sales climbed 0.3%, and food and beverage sales rose 0.2%. On the weaker side, eating and drinking sales were flat (0.0%), while electronics sales fell 0.3%, the second consecutive monthly decline, furniture sales decreased 1.0%, and health and personal care sales fell 1.4% at the end of the year.
• University of Michigan Consumer Sentiment (Jan 19) – The University of Michigan Consumer Sentiment Index jumped from 69.7 to 78.8 in the preliminary January report, marking the largest monthly increase since 2005 and the highest level since July 2021. In the details of the report, a gauge of future expectations rose from 67.4 to 75.9, and a gauge of current conditions gained 10 points to a reading of 83.3 in the preliminary January report, the highest reading since July 2021.
• Consumer Spending and Income (Jan 26) – Personal income rose 0.3% in December, as expected and following a 0.4% increase in November. Consumer spending, meanwhile, increased 0.7% in December, surpassing the 0.5% gain expected and the largest increase in three months. Year-over-year, consumer spending increased 5.9%, the largest gain in four months, and personal income rose 4.7%, also the largest gain in four months. Adjusting for inflation, real consumer spending rose 0.5% for the second consecutive month, while real income increased 0.1% in December, down from a 0.5% gain in November. Over the past 12 months, real spending rose 3.2%, the largest annual increase since February 2022, and real disposable personal income gained 2.0%, the largest increase in six months.
• Consumer Confidence (Jan 30) – Consumer confidence, according to the Conference Board, rose from 108.0, revised down from 110.7, to a reading of 114.8 in January, as expected and the highest reading since December 2021. In the details of the report, a gauge of current conditions increased from 147.2 to 161.3, the highest reading since March 2020, and a gauge of future expectations gained from 81.9 to 83.8 in January, a six-month high.

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Inflation

• CPI (Jan 11) – The Consumer Price Index (CPI) rose 0.3% in December, more than the 0.2% gain expected and following a 0.1% increase in November. Year-over-year, consumer prices rose 3.4%, more than the 3.2% rise expected and the largest gain in three months. Food prices rose 0.2%, and energy prices increased 0.4% in December following two consecutive months of decline. Excluding food and energy costs, the core CPI rose 0.3%?in December, as expected and following a similar increase the month prior. Year-over-year, the core CPI increased 3.9%, down from the 4.0% gain in November and marking the smallest annual gain since May 2021. In the details of the report, airline fares increased 1.0% in the final month of 2023, the largest monthly gain since August, medical care prices increased 0.6%, and shelter prices gained 0.5%, due to a 0.5% rise in the OER. Also, recreation prices rose 0.4%, transportation prices increased 0.2%, commodities prices gained 0.1%, as did education and communication prices in December. On the other hand, other goods and services costs fell 0.2% in December.
• PPI (Jan 12) – The Producer Price Index (PPI) unexpectedly fell 0.1% in December following a similar decline in November and a 0.4% drop in October. According to the median forecast, producer prices were expected to rise 0.1%. Year-over-year, producer prices rose?1.0% in December, up from the 0.8% gain in November and the largest annual increase in two months. Food prices fell 0.9% following a 0.7% rise the month prior, while energy prices dropped 1.2% in December, the third consecutive month of decline. Excluding food and energy costs, the core PPI was flat (0.0%) for the third consecutive month. According to the median forecast, core producer prices were expected to rise 0.2% at the end of Q4. Year-over-year, the core PPI increased 1.8% in December, down from the 2.0% annual gain in November and the smallest annual increase in three years. Additionally, services costs were flat (0.0%), despite a 0.8% drop in trade costs and a 0.4%decline in transportation and warehousing costs.
• PCE (Jan 26) – The Personal Consumption Expenditures (PCE) Index rose 0.2% in December, as expected and following a 0.1% decline in November. Year-over-year, headline inflation increased 2.6% for the second consecutive month, as expected. Excluding food and energy, the core PCE rose 0.2% in December, as expected. Year-over-year, core inflation increased 2.9%, down from a 3.2% annual increase in November and the smallest annual increase since March 2021.

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Manufacturing and Production Activity

• ISM Manufacturing (Jan 3) – The ISM Manufacturing Index ticked up from 46.7 to 47.4 in December, slightly more than the expected rise to 47.1 and a three-month high. At 47.4, however, this still marks the 14th consecutive month of contraction (a reading below 50). In the details of the report, production rose into expansionary territory, gaining from 48.5 to 50.3, employment increased from 45.8 to 48.1, and backlog of orders rose six points to a reading of 45.3 in December. On the other hand, new orders decreased from 48.3 to 47.1, inventories declined 0.5 points to 44.3, and prices paid fell from 49.9 to 45.2 in December, averaging 45.8 in the past six months. Also, customer inventories slipped from 50.8 to 48.1 at the end of the year, marking a three-month low.
• ISM Services (Jan 5) – The ISM Services Index dropped from 52.7 to a reading of 50.6 in December, more than the expected decline to 52.5 and a seven-month low. In the details of the report, employment declined sharply by 7.4 points to 43.3, averaging 50.5 over the past six months, inventories dropped from 55.4 to 49.6, and supplier deliveries slipped from 49.6 to 49.5 in December. Also, new orders declined from 55.5 to 52.8, and prices paid declined from 58.3 to 57.4 in December, a five-month low. On the other hand, backlog of orders rose 0.3 points to 49.4 in the final month of 2023.
• Empire Manufacturing (Jan 16) – The Empire Manufacturing Index plunged from -14.5 to -43.7 in January, the lowest level since May 2020. According to the median forecast, the index was expected to rise to a reading of -5.0. In the details of the report, prices paid rose from 16.7 to 23.2, a three-month high, while prices received ticked down from 11.5 to 9.5 in January, a six-month low. Additionally, new orders dropped from -11.3 to -49.4, and inventories fell from -5.2 to -7.4 at the start of the year. On the other hand, the number of employees increased slightly from -8.4 to -6.9, averaging -3.5 over the past 6 months, and the six-month general business conditions index rose from 12.1 to 18.8 in January, a three-month high.
• Industrial Production (Jan 17) – Industrial production unexpectedly rose 0.1% in in December. According to the median forecast, production was expected to decline 0.1%.
• Capacity Utilization (Jan 17) – Capacity utilization remained at 78.6% in December for the second consecutive month. Capacity utilization was expected to tick up to 78.7% in the final month of last year.
• Philly Fed Business Outlook Survey (Jan 18) – The Philly Fed Index rose from -12.8 to -10.6 in January, less than the expected gain to -6.5, albeit the highest reading in two months. In the details of the report, prices paid fell from 24.3 to 11, averaging 19.1 over the past six months, and prices received declined from 12.2 to 6.3. On the other hand, new orders rose from -22.1 to -17.9 and the number of employees increased from -2.5 to -1.8 in January, a two-month high.
• Richmond Fed Manufacturing (Jan 23) – The Richmond Fed Manufacturing Index unexpectedly fell from -11 to a reading of -15 in January, the lowest reading since May 2020. According to the median forecast, the index was expected to rise to a reading of -8 at the start of the year. In the details of the report, shipments rose two points to a reading of -15, a two-month high. On the other hand, new order volume slowed from -14 to -16, and the number of employees plunged from -1 to -15 at the start of the year. Also, capacity utilization declined from -8 to -27, and order backlogs decreased six points to a reading of -23 in January.?
• Kansas City Fed Manufacturing (Jan 25) – The Kansas City Fed Index dropped from a reading of -1 to -9 in January, a six-month low. According to the median forecast, the index was expected to decline two points to -3 at the end of 2024. In the details of the report, prices paid rose from +11 to +24, and the six-month outlook increased six points to +11. On the other hand, employment declined from +7 to -2, shipments fell from -5 to -20, production declined from -5 to -17, and the volume of new orders fell ten points to a reading of -19, a three-month low.
• Durable Goods (Jan 25) – Durable goods orders were unexpectedly flat (0.0%) in December following a 5.5% rise in November. According to the median estimate on Bloomberg, durable goods orders were expected to rise 1.5%. Year-over-year, headline orders rose 4.8% in December, down from the 9.5% annual increase the month prior. Transportation orders fell 0.9% following a 15.3% gain the month prior, despite a 0.4% rise in civilian aircraft orders and a 0.4% increase in vehicle and parts orders. Excluding transportation, durable goods orders rose 0.6% in December, and increased 2.3% over the past 12 months, the largest annual gain in 14 months. In other details, electrical equipment orders jumped 1.8%, primary metals orders increased 1.4%, and fabricated metals orders rose 0.9% in December. Also, computers and electronics orders increased 0.4%, and machinery orders gained 0.2% in the final month of 2023.
• Capital Goods (Jan 25) – Capital goods orders dropped 1.1% in December. Nondefense capital goods orders, however, rose 0.6% following an 18.3% increase in November. Capital goods orders excluding aircraft and defense – a proxy for business investment – rose 0.3% in December following a 1.0% rise the month prior. Year-over-year, business investment increased 1.9%, down from the 2.2% annual gain in November.
• Dallas Fed Index (Jan 29) – The Dallas Fed Manufacturing Activity Index declined from a reading of -10.4 to -27.4 in January, surpassing the expected decline to -11.0 and an eight-month low. In the details of the report, capacity utilization dropped from +0.6 to -14.9, production decreased from +1.2 to -15.4, and new orders fell from to -10.1 to -12.5, averaging a reading of -12.0 over the past six months. Also, employment decreased from a reading of -2.8 to -9.7, the lowest reading since May 2020. Additionally, the six-month general business outlook index declined from -9.3 to -10.4 in January, a two-month low.
• Chicago PMI (Jan 31) – The Chicago PMI unexpectedly fell from 47.2 to a reading of 46.0 in January, a three-month low. According to the median forecast, the index was expected to rise to 48.0 at the start of the year. In the details of the report, prices paid and deliveries rose, signaling expansion. On the other hand, new orders, employment, and order backlogs fell, signaling contraction.

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Housing Market Activity

• Construction Spending (Jan 2) – Construction spending rose 0.4% in November, falling short of the 0.6% gain expected and following a 1.2% rise in October. Over the past 12 months, however, construction spending increased 11.3%, down from the 11.6% annual increase in October.
• NAHB Housing Market Index (Jan 17) – The NAHB Housing Market Index increased from 37 to a reading of 44, surpassing the expected gain to 39 and the highest reading in four months.?
• Building Permits (Jan 18) – Building permits rose 1.9% in December, pulling the annual pace up from 1.467M to 1.495M, a two-month high. Building permits were expected to rise 0.7% in December, according to Bloomberg. Single family permits rose 1.7% and multi-family permits gained 2.2%. Year-over-year, building permits rose 6.1% in December, the largest annual increase since March 2022.
• Housing Starts (Jan 18) – Housing starts fell 4.3% in December, the first monthly decline in four months and pulling the annual pace down from 1.53M to 1.46M, a two-month low. Starts were expected to decline 8.7%, according to the median forecast on Bloomberg. Single family starts dropped 8.6%, while multi-family starts climbed 8.0%. Year-over-year, housing starts rose 7.6% in December, the largest annual gain since April 2022. ?
• Existing Home Sales (Jan 19) – Existing home sales unexpectedly fell 1.0% from 3.82m to 3.78m in December, the lowest since August 2010. According to the median forecast, existing home sales were expected to rise 0.3%. For the full year of 2023, existing home sales dropped 18.7% to 4.09m units, down from 5.03m units in 2022 and the lowest level since 1995. Year-over-year, existing home sales fell 6.2% in December, the 29th consecutive month of decline, albeit up from the 7.3% drop in November. Despite a fall in sales, the months’ supply of existing homes ticked lower from 3.5 months to 3.2 months, averaging 3.4 months over the past three months. From a price standpoint, the median cost of a previously owned home rose 4.4% in December from a year earlier to $383k, down from the $388k median price reported in November. The median home price for 2023 came in at $389.8k, a record high.
• New Home Sales (Jan 25) – New home sales rose 8.0% in December from 615k to 664k, a two-month high. According to the median forecast, new home sales were expected to rise 10.0%. Over the past 12 months, sales rose 4.4%, down from the 5.7% gain the month prior. Due to a rise in sales, the months’ supply of new homes fell from 8.8 months to 8.2 months, the lowest since October. From a price standpoint, the median cost of a newly constructed home fell 3.0% from the month prior to $413k. Year-over-year, new home prices dropped 13.8% in December following a 7.9% decline in November. ?
• Pending Home Sales (Jan 26) – Pending home sales jumped 8.3% in December, well surpassing the 2.0% rise expected. Over the past 12? months, however, pending home sales declined 1.0%, up from the 5.5% drop the month prior, albeit the 25th consecutive month of decline.
• S&P/CS 20 City & National Index (Jan 30) – The S&P Case-Shiller 20 City Home Price Index rose 0.15% in November, less than the expected gain of 0.50% and down from the 0.63% gain in October. The National Home Price Index, meanwhile, rose 0.24% in November following a 0.59% increase in October. Over the past 12 months, the 20-city index rose 5.45%, the largest annual gain since November 2022, and the national index increased 5.16%, marking its largest annual gain since December 2022.

Trade and Currency

• U.S. Dollar (Jan 31) – The U.S. dollar closed out the first month of 2024 slightly higher as traders dialed back expectations for the first Fed rate cut beyond the March meeting. The dollar rose 1.9% to $103.27.
• Trade Balance (Jan 9) – The U.S. trade deficit unexpectedly narrowed 2% from -$64.3b to -$63.2b in November. According to the median forecast, the deficit was expected to widen to $64.9b. The value of imports fell 1.9% to $316.944b, the lowest since August, and the value of exports also declined 1.9% to $253.737b in November, a four-month low.
• Import & Export Prices (Jan 17) – Import prices were unchanged in December following a 0.5% decline in November. According to the median forecast, import prices were expected to fall 0.5% at the end of last year. Meanwhile, export prices dropped 0.9% in December, more than the 0.7% decline expected and following a 0.9% fall in November. Over the past 12 months, import prices slipped 1.6% and export prices declined 3.2%.

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?Monetary Policy, Reports, and Commentary

• Atlanta Fed GDPNow Forecast

o?? (Jan 26) – Following a stronger-than-expected 3.3% rise in growth in Q4, the initial forecast for GDP in the first quarter of 2024 according to the Atlanta FedGDP Now model was reported at 3.0%. At 3.0%, this would mark a three-quarter low.

• Fed Speak/News (Jan 3) – Richmond Fed President Thomas Barkin reminded market participants that any further rate moves – be that rate hikes or rate cuts – will depend on the progress of inflation and the economy, and that a soft landing was very likely but not “inevitable.” Speaking to the Chamber of Commerce in Raleigh, North Carolina, Barkin said, “A soft landing is increasingly conceivable but in no way inevitable. Demand, employment and inflation all surged but now seem to be on a path back toward normal.” He went on to say that investors better “buckle up” as he “can't give more guidance from the flight deck.” “Forecasting is difficult, and conditions are ever evolving," Barkin noted. (Jan 8) – Federal Reserve Governor Michelle Bowman voiced support for rate cuts this year if inflation continues to fall toward the Fed’s 2% target. Speaking to the South Carolina Bankers Association in Columbia, Bowman said, “Should inflation continue to fall closer to our 2% goal over time, it will eventually become appropriate to begin the process of lowering our policy rate to prevent policy from becoming overly restrictive.” However, as a long-standing hawk, Bowman made it clear that “we are not yet at that point.” She also noted that easing of financial conditions and solid growth could reignite inflation: “There is also the risk that the recent easing in financial conditions encourages a reacceleration of growth, stalling the progress in lowering inflation, or even causing inflation to reaccelerate.” (Jan 8) – Atlanta Fed President Raphael Bostic suggested that inflation is moving towards the Fed’s 2% target, although it was too soon to declare victory. Speaking to the Rotary Club of Atlanta, Bostic said, “We are on a path to 2% today. The goal is to make sure we stay on the path.” Bostic told reporters following the event that he has penciled in two rate cuts this year with the first cut expected in the third quarter. (Jan 10) – New York Fed President John Williams noted that current monetary policy should bring inflation back towards the Fed’s goal. Speaking in White Plains, New York, Williams said, “My base case is that the current restrictive stance of monetary policy will continue to restore balance and bring inflation back to our 2% longer-run goal, ” adding,?“I expect that we will need to maintain a restrictive stance of policy for some time to fully achieve our goals, and it will only be appropriate to dial back the degree of policy restraint when we are confident that inflation is moving toward 2% on a sustained basis.”? (Jan 16) – According to Federal Reserve Governor Christopher Waller, the Fed will likely start cutting interest rates later this year as long as inflation continues to retreat closer to 2%. “I will need more information in the coming months confirming or (conceivably) challenging the notion that inflation is moving down sustainably toward our inflation goal…The data we have received the last few months is allowing the committee to consider cutting the policy rate in 2024, However, concerns about the sustainability of these data trends requires changes in the path of policy to be carefully calibrated and not rushed,” Waller said.

December 12-13 FOMC Meeting Minutes (Jan 3)

·?????? The December 12-13 FOMC meeting minutes noted that policy makers agreed that rates would remain restrictive “for some time,” but at the same time recognized that the federal funds rate was “likely at or near its peak for this tightening cycle.” The minutes also noted that there was “an usually elevated degree of uncertainty” regarding the economic outlook. While most have been more than willing to jump on the bandwagon of rate cuts sooner than later, the latest Fed minutes seemingly throw cold water on the notion of a reduction in rates in the first quarter. In other words, the market appears to have gotten ahead of itself again, counting chickens before they hatch. Investors are seemingly desperate for a reduction in rates, but optimism or hope for rate cuts is not enough to convince the central bank to take action. Rather, the evolution of the data and more specifically, the pathway for inflation will dictate policy directives going forward. The presence of disinflation appears encouraging but price pressures still remain elevated, above the target of 2%, suggesting the Fed’s job is not done just yet.

Beige Book (Jan 17)

·?????? According to the latest Fed Beige Book, U.S. economic activity showed "little or no change" since the last release on November 29. In the details, for most of the Federal Reserve's 12 Districts there were stable or ongoing signs that the labor market was “cooling” in most regions. Inflation was reportedly mixed with six Districts noting slight or modest price increases. Going forward, the majority of Districts signaled that expectations of their firms for future growth were positive, had improved, or both, general optimism boosted no doubt by the prospect of easier financial conditions. “However, the prospect of falling interest rates was cited by numerous contacts in various sectors as a source of optimism,” the Beige Book noted. Districts reporting economic expansion for their period include Cleveland, Richmond, Atlanta, Chicago and Dallas. Meanwhile, Boston, New York, Minneapolis and Kansas City reported weaker activity. Among those posting stable activity were Philadelphia, St. Louis and San Francisco.

January 30-31 FOMC Meeting

·?????? As expected, the Fed held rates steady for the fourth consecutive meeting in a range of 5.25-5.50%. Also as expected, the Fed removed the likelihood of any additional policy firming and further inched open the door to eventual rate cuts. Removing the phrase “In determining the extent of any additional policy firming that may be appropriate…,” the January statement now reads that the “risks to achieving its employment and inflation goals are moving into better balance.” That being said, the statement also clarified that the Fed is not in any hurry to reduce policy firming nor do officials think it will be appropriate to do so anytime soon. Furthermore, any support for a reduction in rates will not come unilaterally, but with the prerequisite of further improvement in inflation. Amid “solid” growth, an upgrade from “strong” in December, “strong” job gains and “low” unemployment, inflation has come down but remains “elevated.” Given such robust conditions, “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.” The central bank also reiterated its focus on reducing the balance sheet by $95 billion per month while removing any mention of a “sound and resilient” banking system, along with a warning of the impact of “tighter financial and credit conditions.” The decision was unanimous.

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Domestic News and Activity?

• Politics and the Biden Administration

• (Jan 8) – Congressional leaders announced a $1.59T bipartisan deal to avoid a government shutdown. The measure includes $886B for the military and $704B for nondefense spending. Additionally, the deal secures $16B in spending cuts, consisting of $10B in IRS money and $6.1B in unspent COVID funds. In a letter to colleagues, House Speaker Mike Johnson noted, “While these final spending levels will not satisfy everyone, and they do not cut as much spending as many of us would like, this deal does provide us a path to: 1) move the process forward; 2) reprioritize funding within the topline towards conservative objectives, instead of last year’s Schumer-Pelosi omnibus; and 3) fight for the important policy riders included in our House FY24 bills.”? Additionally, Senate Majority Leader Chuck Schumer and House Democratic Leader Hakeem Jeffries said in a joint statement, "The framework agreement to proceed will enable the appropriators to address many of the major challenges America faces at home and abroad. It will also allow us to keep the investments for hardworking American families secured by the legislative achievements of President Biden and Congressional Democrats.” (Jan 12) – Massive?disruptions to shipping passages continued with estimated costs rising over 130% for containers moving from North Asia to the U.S. East Coast as a result of?unprecedented Houthi attacks.?In response, the U.S. and Britain?authorized airstrikes on more than a dozen sites in Houthi-controlled areas of Yemen?radar installations, storage sites and missile launchers.?According to President Biden, “These strikes are in direct response to unprecedented Houthi attacks [that] have endangered U.S. personnel, civilian mariners, and our partners, jeopardized trade, and threatened freedom of navigation."
• (Jan 18) – The U.S. government cleared a temporary spending bill that will keep the federal government open until early March. While a welcome outcome relative to a potential shutdown, this was the third extension made in four months, with officials seemingly no closer to a longer-term funding bill for the 2024 fiscal year, which began on October 1, 2023. Of course, not everyone was pleased with a Band-Aid solution. According to reports, “hardline” Republicans pushed back on the measure. The House Freedom Caucus, for example, called on "all conservatives" to oppose the proposed bill. Members of the Freedom Caucus urged Republicans to refuse any deal that didn’t contain steep spending cuts and immigration reform proposals.
• (Jan 23) – Florida Governor Ron DeSantis dropped out of the presidential race. As such, the Republican nominee for 2024 has been narrowed down to former President Donald Trump and former U.N. Ambassador Nikki Haley.?Haley continues to focus on Trump’s age and mental fitness, as well as her appeal to female voters.?
• (Jan 30) – The International Monetary Fund (IMF) increased its forecast for global growth from 2.9% to 3.1% in 2024. The rise reflects heightened expectations for the U.S. as growth accelerated into year-end at 3.3%, as well as for China, with the government recently pumping 2 trillion yuan ($278 billion) of stimulus in the marketplace.

International News and Activity?

·?????? China

o?? (Jan 23) – China implemented a 2 trillion yuan ($278 billion) stimulus package to “stabilize plummeting stocks,” and expand a ban on net stock selling by major mutual funds to some insurers. Since the country’s reopening, plagued by massive debt, a tepid consumer and weakness in the property market, growth has slumped to an average pace of 4.1% in 2022-2023 compared to 6.4% in 2018-2019 leading into the COVID crisis. Additionally, China will reduce the reserve requirement ratio for banks by 50bps, potentially adding 1 trillion yuan ($139 billion) in liquidity.

·?????? Canada

o?? (Jan 24) – As expected, the Bank of Canada (BOC) held rates steady at 5.00% for the fourth consecutive meeting. The BOC’s latest decision comes as central banks around the developed world face an ongoing conundrum of slowing growth and still high inflation.

·?????? Europe

o?? (Jan 24) –?After months of deliberations, Turkey's parliament approved the entry of Sweden into the North Atlantic Treaty Organization (NATO). As the sole holdout, Hungary’s Prime Minister Viktor Orbán is now expected to also approve Sweden’s NATO bid, potentially making the world’s largest Scandinavian economy the 32nd ?member. Once Sweden joins the alliance, Russia will be the only non-NATO country to border the Baltic Sea, complicating access to the Atlantic without crossing NATO-controlled shores.

o?? (Jan 25) – The European Central Bank (ECB) opted to hold rates steady for its third consecutive meeting with the deposit rate at 4%, the main refinancing rate at 4.50%, and the marginal lending facility rate at 4.75%. The European Central Bank (ECB) has undergone a significant tightening of policy, raising rates the past 18 months in an attempt to slow inflation. European central bankers have been somewhat successful in slowing price pressures, but inflation remains above the ECB’s target. Eurozone inflation peaked at 10.7% in October 2022. As of December, inflation has fallen to 2.9%.?

o?? (Jan 30) – The Eurozone narrowly avoided a further contraction at year-end, with growth flat from the previous quarter following a 0.1% decline in Q3. Support for the region stemmed from Italy and Spain, with growth up 0.2% and 0.6%, respectively. On the other hand, Germany, the largest economy in the region, declined 0.3%, and France posted no growth for the second consecutive quarter.

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-Lindsey Piegza, Ph.D., Chief Economist

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