Halyard’s Weekly Wrap – 1/26/24 – Solid GDP and Low Unemployment – a recipe for a rate “cut?”

Three years ago, the watchword was “transitory inflation;” that was followed last year by “higher for longer.”  On the back of the Fed’s communication that they expect to cut rates three times this year, the new watch word on the street is “wait and see.”  The reason for the uncertainty is the moderation the economy has displayed.  Inflation has drifted lower, the jobs market remains robust, and consumers continue to consume.  In short, the economy appears to be in equilibrium.  Given that circumstance, the Fed should not be in a hurry to cut rates.  Except that the real estate market is being negatively impacted by relatively high interest rates.  The residential market is clearly being hampered by high mortgage rates, but the concurrent shortage of inventory has prevented a collapse of home prices.  But commercial real estate is not enjoying the same dynamic.  In addition to higher borrowing rates, commercial real estate continues to be challenged by the hangover of the COVID-related work from home mentality.  While lower rates would help offset some of the expense of excess office space, we expect that the sector is in the early days of a years-long retrenchment.

The highlight of this week’s economic data was the release of 4Q GDP, which came in at 3.3%, down from the 4.9% recorded in the third quarter, but much better than expected.  Economists were expecting growth to come in at 2.0% so the 3.3% outcome was a welcome result.  Private domestic final purchases were a significant driver of GDP, coming in at 2.6%, down slightly from the 3.0% recorded in the third quarter.

Next week the market has top-shelf economic data to navigate and the docile trading environment we’ve been in may turn more volatile.  The Federal Open Market Committee meets on Tuesday and Wednesday but is not expected to make any changes to the overnight rate.  But a host of economic results will give us a peak at how the economy is doing in the post-holiday January period, culminated by the monthly employment report for January, to be released next Friday.  The consensus is looking for 178,000 new jobs for the month with the unemployment rate remaining unchanged at 3.7%.