Macro
The early 2024 inflation data has thrown a curveball for both markets and the Fed. The path forward to the Fed’s target was never going to be linear, so we caution on extrapolating from just one month of inflation data. However, the longer the Fed pushes back the easing cycle, the more risks form. The regional banking system and CRE are in desperate need of lower rates.
Yet, we live in a world of aggregate data where averages mask the reality of the true health of the US economy. In the stock market, a narrow set of companies is driving the gains; this wealth effect is creating greater wealth inequality (which partly explains the decline in US consumer confidence). Additionally, underlying jobs data is not as robust as headline numbers state.
Meanwhile, there is a sense of frustration (which we can commiserate) on two things: “how come higher rates do not seem to be working as they used to?” and “how long can the delayed signal from an inverted curve remain as valid (as well as other indicators) before we start ignoring them completely?”
With the Fed speakers successfully pushing back on rate cuts and getting market expectations in alignment with their prior forecasts of three cuts in 2024, from this point forward it’s a more level playing field, in our view.
Lastly, we are mindful of the Ides of March. In the coming weeks, we will learn if the inflation rebound was a one-off or a potential trend in the making. We will hear from chair Powell at his semi-annual testimony and get new inflation and dot plot forecasts from the Fed at the March FOMC too.
Special Topics
- Inverted curves and the Fed on hold (both usually do not last for long)
- We briefly review the CRE landscape and provide big picture implications
Markets
What is truly amazing is that even with the renewed focus on inflation fears, which has unwound half of the rate cut expectations, vols in most asset classes continue to decline. This is even more impressive given geopolitical risks that still linger, and soon to be of concern, the US election. It seems to be an unhealthy case of complacency combined with a lack of conviction.
For now, we will be pushing back our initial rate cut one FOMC meeting at a time. We went from March to May knowing fully well that the first cut could end up being June. Why? We argue the longer the Fed waits, the more likely they may need to ease more or move to larger than 25bp rate cuts in the backend of the easing cycle. Until we get clarity on the macro outlook and Fed policy true intentions, we advocate buying major dips in the front-end.
Please see the PDF report link above for the full write-up with charts and forecasts…
