Halyard’s Weekly Wrap – 3/29/24 – Firmer economic data upsets front end rate cut wagers

Though the minutes of the recent FOMC meeting reconfirmed the committee’s expectation that they’ll cut the overnight rate three times this year, market consensus is moving away from that expectation.  Fed fund futures had priced in as many as five rates cut by December at the start of this year.  Instead, the future now implies about 60 basis points of rate cuts by the end of this year.

Driving the change in sentiment is economic data that continues to indicate that economic activity has moderated but by no means is showing signs of slipping into recession.  That was evident this week as consumer confidence, Q4 GDP revision, and pending home sales came in moderately above expectations.  Further driving skepticism on the Fed’s forecast, their favored inflation measure, core PCE showed further stubbornness with the year-over-year measure stuck at 2.8%.

Adding to the economic optimism has been the upward climb in stock prices.  The S&P 500 is poised to close out the first quarter with more than a 10% total return as the correction of last October has been all-but-forgotten and the AI-driven rally continues to broaden in the market.

Bond investors, always a skeptical lot, have repriced the yield curve.  The spread between the 2-year note and the 30-year bond, which briefly turned positive in January, has begun to further reinvert, closing out this week at -27 basis points.  The logic behind the move is that the Fed will back from its pledge to cut rates as aggressively as the dot plot anticipates and that the 2-year note will approximate the overnight rate.

Next week, as it is every month, the focus will be on the jobs report.  Job growth over the last year has been well above trend and with consensus looking for 205,000 jobs added in March, that would continue the trend and a further disincentive to reduce the overnight rate.