Halyard’s Weekly Wrap – 1/12/24

Communicating that they expected three 25 basis point rate cuts this year, the open market committee members convinced bond buyers that all was well and to expect inflation to continue to fall as the year progressed.  Then the December inflation reports were released.  On Thursday the consumer price index, year-over-year, reversed course and ticked up to 3.4%, up from the 3.1% recorded last month.  The expectation was that it would rise 0.1%.  On the same morning, the lesser-followed Atlanta Fed wage tracker, a measure of aggregate wages, ticked up to 5.4% year-over-year from the 5.1% recorded in November. Those measures indicate that consumers are still “paying up” to consume and are demanding higher wages to keep pace with rising prices.  That result is going to make it difficult for the Fed to cut the overnight rate at the March FOMC meeting.  That meeting is scheduled for March 20th, giving the Fed two more inflation reports to examine.  But, given the Fed’s newfound credibility as an inflation-fighter, we think the committee will be unwilling to cut rates while inflation is still a problem.

Bulls were heartened by the producer price index released on Friday morning indicating the year-over-year core inflation rose 1.8%.  While PPI is a widely watched indicator by Wall Streeters, it’s usually neglected by the mainstream media and the message coming out of this week is that inflation is still running hot.  Indeed, Fed speakers this week seem to be walking back the dovish message that was put forth at the last FOMC meeting.

Next week we’ll be watching the release of statistics on Retail Sales, Housing, and the University of Michigan survey.  Consensus opinion is that the holiday selling season ended on a positive note, with total sale rising 0.4% over the November tally.  Anecdotally, given the post-holiday mall traffic, that need to consume seems to have carried into the early days of the new year.

In a late Friday note, the Barclay’s Bank changed their forecast and are now calling for a rate cut at the March FOMC and a cut at every other meeting this year, citing falling PCE, the Fed’s preferred inflation gauge.  While the news didn’t have a material effect on interest rates, it did stir some discussion before the long weekend.