This week featured a proliferation of Fed speakers, along with key inflation, manufacturing, and consumer data. The Fed’s preferred inflation gauge, Core Personal Consumption Expenditures (Core PCE), came in slightly hot as expected, up 0.4% month-over-month in January, but eased to a 2.8% increase on a year-over-year basis versus 2.9% in December. Services inflation excluding housing and energy was up 0.6% for the month. Personal Income surged 1% in January, while spending decelerated to an increase of just 0.2%. Spending on services such as housing, utilities, financial services, and healthcare was offset by a large drop in goods purchases. US consumers are showing signs of being more conservative with their earnings as their outlook has weakened, but the US personal savings rate remained stubbornly low at 3.8% for January.
The Consumer Confidence Index fell to 106.7 as of mid-February from a downwardly revised 110.9 in the prior month. The lower reading was largely due to a deteriorating view of the labor market and business conditions. Survey participants also indicated that they scaled back plans for big-ticket purchases such as cars, homes, large appliances, and vacations. The University of Michigan Sentiment Index fell unexpectedly to 76.9 for February from the prior reading of 79.6. This is possibly due to rising gas prices, as WTI crude oil rose to $80/barrel from the mid-$70s at the beginning of February. Consumer inflation expectations called for a 3% increase in prices over the next year, and 2.9% over the longer term. ISM Manufacturing came in weaker than expected for February, falling to 47.8 from 49.1 in January as new orders slowed.
The housing sector is still showing signs of resilience, however, and has been a major contributor to persistent inflation. The Case-Shiller 20-City Home Price Index was up 6.13% year-over-year for December, with San Diego (8.8%) and Los Angeles (8.3%) leading the gains on a year-over-year basis. New home sales edged higher by 1.5% to 661,000 for January, receiving a boost from a dip in mortgage rates at the beginning of the year and tight existing home supply.
Fed speakers throughout the week indicated that they can be patient with rate cuts as they are looking for inflation to ease a bit more. Their overall sentiment was that a rate cut in March is unlikely, and that they expect three gradual quarter-point rate cuts for this year beginning this summer. This is relatively consistent with the fed fund futures market that is currently pricing in 3-4 rate cuts for 2024 beginning at the June or July FOMC meetings.
Interest rates fell on the cautionary data this week; the 2-year US Treasury dropped 13 basis points to 4.54%, the 5-year was down 11 basis points to 4.17%, and the 10-year eased lower by 6 basis points to 4.20% as of this writing. The yield curve inversion between the 10-year and the 2-year moderated from -41 basis points at the end of last week to -34 basis points today. Next week the market will get the highly anticipated US employment report. The Bloomberg consensus of economists is calling for an increase in non-farm payrolls of 200,000 and for the unemployment rate to remain at 3.7% for February.
Next Week:Factory Orders, ISM Services Index, MBA Mortgage Applications, ADP Employment Change, JOLTS Job Openings, Federal Reserve Beige Book, Consumer Credit, Employment Report
© 2024 Chandler Asset Management, Inc. An Independent Registered Investment Adviser. All rights reserved. Data source: Bloomberg, Federal Reserve, and the US Department of Labor. This report is provided for informational purposes only and should not be construed as specific investment or legal advice. The information contained herein was obtained from sources believed to be reliable as of the date of publication, but may become outdated or superseded at any time without notice. Any opinions or views expressed are based on current market conditions and are subject to change. This report may contain forecasts and forward-looking statements which are inherently limited and should not be relied upon as an indicator of future results. Past performance is not indicative of future results. This report is not intended to constitute an offer, solicitation, recommendation, or advice regarding any securities or investment strategy and should not be regarded by recipients as a substitute for the exercise of their own judgment. Fixed income investments are subject to interest rate, credit, and market risk. Interest rate risk: The value of fixed income investments will decline as interest rates rise. Credit risk: the possibility that the borrower may not be able to repay interest and principal. Low-rated bonds generally have to pay higher interest rates to attract investors willing to take on greater risk. Market risk: the bond market, in general, could decline due to economic conditions, especially during periods of rising interest rates. The S&P Corelogic Case-Shiller home price index tracks monthly changes in the value of residential real estate in 20 metropolitan regions across the nation.