Halyard’s Weekly Wrap – 12/22/23 – Fed Delivers Holiday Cheer

The Euphoria from last week’s news that the Fed was done raising interest rates and expects to cut rates by 75 basis points next year continued into this week.   In anticipation of those cuts, the entire yield curve has priced approximately 100 basis points lower.  The knock-on effects can be found almost everywhere; the S&P 500 is less than 1.0% off an all-time high, mortgage rates are back below 7.0%, and consumer confidence as measured by the Conference Board’s present situation index is skyrocketing.  But we wonder if that euphoria is unwarranted.  After all, the move lower in rates is an easing of financial conditions, coming while year-over-year core CPI is 4% and pressure for higher wages is unrelenting. 

 

Indeed, the economic data this week was shaded to the high side with housing starts jumping nearly 15% over last month’s measure and the Personal Consumption Index showed year-over-year core inflation was 3.2%. Lower than last month’s measure but still above the Fed’s target. Despite that, December 2024 Fed Fund futures are pricing in 150 basis points of rate cuts. The change in the dot plot paired with the less hawkish tone of the Fed speeches pretty much relegate the “higher for longer” mandate to the same dustbin as “transitory inflation.” Maybe the new mantra will be lower sooner.  

 

Next week is likely to be a light week given the dearth of primary economic data. Moreover, the year-end window-dressing doesn’t seem to be showing any signs of dislocation.