New year, a slightly calmer market
The market looks like I'm losing my nerve a little When it comes to confidence that the Fed will cut rates aggressively this year.
Rumors of an early rate cut began to capture traders' imaginations in the fourth quarter of last year, when it became clear that the Fed's July rate hike would be its last in 2023. Historically, The average time between the last Fed rate hike and the first rate cut is 8 months.the Fed's March meeting is definitely considered within reason.
Following the Fed's December meeting and Fed Chairman Jerome Powell's decidedly dovish press conference. The market has decided that a March interest rate cut is almost inevitable.. As of last week, the federal funds futures market had a 90% chance of at least one rate cut by the March meeting, including a 17% chance of two quarterly point rate cuts or one 50 basis point rate cut. It showed that.
This has a positive impact on bond prices and stock prices, santa claus gathering To both. Bonds were auctioned, pushing the 10-year yield below the 4% level that was considered a fanciful prediction by Wall Street's extreme dovs just a few months ago. Stock prices soared like a stag crossing a frosty stream.
As we enter the new year, the market is starting to feel a bit more sober. The probability of a March rate cut, as suggested by the federal funds market, remains very high, but the probability has fallen to about 75%. The 10-year bond yield is about to surpass the 4% threshold. Major stock indexes fell for the second consecutive day on Wednesday.
Looking further into this year, Implicit prediction of the federal funds rate That changed at the end of the year. The Fed's target range is still expected to be supported at 3.75% to 4%, which is 1.5 percentage points lower than the target in place since July. That's the expected sixth quarter-point rate cut this year, and about twice the median forecast by Fed officials in their December overview.
However, the probability of a cut of just 1.25 percentage points has nearly doubled to nearly 23%, and the probability of a cut of 1.75 percentage points has fallen from 39% to 28%.In other words, there is certainty is very low More implied by futures prices than on the other side of the new year.
Increased risk of re-acceleration
market is still Underestimating the risks of economic acceleration That's enough to reignite inflation or at least prompt Fed officials to hold off on cutting rates.
The housing market, for example, is not supportive of the idea that inflation will continue to fall next year.of Case-Shiller National Home Price Index It rose for the ninth consecutive month in October, showing that home prices rose 4.8% year-on-year. Just counting 2023, house prices rose by 6.3% by October. These prices tend to be leading indicators of the housing component of inflation (rents and owner-occupied rent equivalents), so we should expect the large housing component of the CPI to start rising later this year. .
we found out on tuesday construction expenditure It rose in November, marking the 11th month of increase. Construction spending for the year increased by 11.3%. Private residential construction increased by 1.1% in November, and single-family construction increased by 2.9%. This indicates that financial conditions are easing in one of the most interest rate sensitive sectors of the economy.
Released in November Recruitment/turnover rate survey, or JOLTS, appears to be providing reassurance that the labor market is cooling, with the number of job openings falling and coming in slightly lower than expected. However, progress in store openings appears to have slowed in recent months. Additionally, construction site vacancies are increasing rapidly and approaching post-pandemic highs. Job openings in durable goods manufacturing, another interest rate-sensitive sector, rose for the second straight month.
We started last year with the market convinced that the economy was in recession and the Fed would be forced to cut interest rates. Although fears of a recession have dissipated, the market still begins the year with confidence that the Fed will cut interest rates. However, the risks are the same. An accelerating economy could force the Fed to keep interest rates higher than the market expects.
