March 18, 2024

“May you be in heaven a half hour before the devil knows your dead”

Old Irish blessing

Well, the luck of the Irish was missing last week as the markets continued a bit of a volatile week. Here are the numbers: The S&P 500 was up slightly .10%, The Dow Jones Industrial Average ended positive .12%, and the Nasdaq surrendered an additional .49%, Internationally, the FTSE 100 gained .88% and the MSCI-EAFE fell .002%. The 2-year Treasury closed with a yield of 4.732%, and the 10-year paid 4.308%.

In honor of St. Patrick’s Day, I thought you would like to know that Irish whiskey has become a dominant force on the US spirits scene: Annual category sales in this country — Ireland’s biggest whiskey export market — have risen over the past 20 years by an impressive 1,482%, to roughly $1.1 billion in 2023 alone, based on supplier revenue, according to the Distilled Spirits Council of the United States. Sláinte!

Inflation numbers were on everyone’s mind last week. The consumer price index grew at an annual rate of 3.2% in February, up from January’s 3.1% pace. While the figure was ahead of economist expectations, also at 3.1%, stocks for some reason rallied on the news, to new record highs. However, Producer price index increases a sharp 0.6% in February, double the Wall Street forecast. This is the biggest increase since last summer. Core PPI (less food, energy & trade) rises 0.4% in February Increase in PPI in the past 12 month climbs to 1.6% from 1%. Yearly rate of core PPI edges up to 2.8% from 2.7%. A greater-than-expected report is problematic for those hoping the Fed will cut rates. Again, in real world, things are still not getting better at the grocery store. Milton Friedman’s stance; “inflation is caused by currency creation more than the real growth of the economy.” Given that measure, inflation should moderate over time, if the government gets its fiscal policy in order.

Testimony by Federal Reserve Chair Jerome Powell last week about rate cuts remaining on the table for 2024, as well as remarks from other Fed officials over the past month, suggest some consistency among policy makers on when they will start lowering interest rates. In the latest Summary of Economic Projections, released in December, the median estimate of FOMC members was for three cuts totaling 75 basis points by the end of 2024. The Fed’s updated interest-rate projections are set to be released next Wednesday.

One influential voice cried out, JP Morgan Chase CEO Jamie Dimon has some advice for the Federal Reserve: It needs to wait longer before cutting interest rates. He is looking for some “clear” signs of economic stability. Dimon said he wouldn’t start lowering rates until after June. On a day when there are fresh consumer-price figures, growth is still strong and inflation is well above target. Those figures, if the Fed is data-dependent, would suggest a longer pause before cutting is prudent, he said. After all, the central bank’s credibility is on the line after inflation spiked in 2022.

Market Watch Isabel Wang reports, “Fed-funds futures continue to price in a first interest-rate cut of 25 basis points for June after the February consumer-price index report showed inflation accelerated last month. Traders see a 60.5% probability that the Fed will cut rate by at least a quarter point from the current range of 5.25% to 5.50% after its meeting in June, up from around a 55% chance in the previous session, according to the CME FedWatch Tool. The chances of at least a 25-basis-point cut by its meeting in May is priced at 12.7%, down from around 21.9% on Monday afternoon. Fed-funds futures also indicate a 99% probability of rates staying the same at the end of its March policy meeting next week.”

On optimistic side…. Consumers still look resilient amid the current bull market for US stocks, despite concerns to the contrary due to the Federal Reserve’s monetary tightening, according to Bank of America Global Research. The death of the US consumer has been “greatly exaggerated,” said B of A equity and quantitative strategists led by Savita Subramanian, in a note last Monday. “Consumption has remained resilient” despite inflation and the increasing rise in interest rates, they said.

On the jobs front, MarketWatch also reported, new jobless claims rose slightly in 28 of the 53 states and territories that report these figures to the federal government. But a big drop in claims in New York tied to spring break dragged the headline number down. The number of people collecting unemployment benefits in the US, meanwhile, rose by 17,000 to 1.81 million, the government said. Steady hiring and low unemployment have given consumers more confidence in their job security, allowing them to keep spending at levels strong enough to prevent a recession. So long as the labor market stays strong, the economy is likely to keep growing.

Does this make any sense? It feels like Federal Reserve officials are watching in crosswinds and conflicting signals as they attempt to pull off a soft landing this year. Fed officials, on the surface, have looked through much of the conflicting underlying signals in the economic data so far. But given that some of these divergent trends have persisted for months, policymakers and markets may need to start taking them more seriously. And that could increase, rather than alleviate, the overall confusion on exactly where the US economy is heading. As Barron’s Megan Leonhardt notes, “It’s a bifurcated set of economic statistics on our hands, and hence the confusion,” David Rosenberg of Rosenberg Research & Associates told me during a recent call. “I’ve been in the business for 40 years and I have never seen so many dichotomies and divergences between economic data points, and within the economic data as we’re seeing today.”

Some good news? Mortgage rates fell to the lowest level in five weeks, bringing some good news for home buyers. The 30-year fixed-rate mortgage rose and averaged 6.74% as of March 14, according to data released by Freddie Mac FMCC, on Thursday. It’s down 14 basis points from the previous week — one basis point is equal to one hundredth of a percentage point. A year ago, the 30-year was averaging at 6.6%. The average rate on the 15-year mortgage was 6.16%, down from 6.22% last week. The 15-year was at 5.9% a year ago. Freddie Mac’s weekly report on mortgage rates is based on thousands of applications received from lenders across the country that are submitted to Freddie Mac when a borrower applies for a mortgage. A nationwide settlement between the National Association of Realtors, several real-estate brokerages and home sellers, to the tune of $418 million, was announced on Friday. Which means real estate commission rates will be negotiated in the future, good news for buyers and sellers, not so much for real estate agents.

Companies around the world are defaulting on their debt at the fastest pace since the global financial crisis as high interest rates and stubborn inflation continue to take their toll, according to a report from S&P Global Ratings.

According to S&P, the number of corporate defaults has climbed to 29 since the start of the year, the highest tally at this point in a year since 2009. While most defaults occurred in the US, an uptick in European bankruptcies is alarming analysts. Stocks trading around the world have been trudged to record or near-record highs this year, leaving them vulnerable to a correction once the sugar high of excessive investor enthusiasm wears off. But another bear market on par with what occurred in 2020 and 2022 remains unlikely, according to strategists at Ned Davis Research. “We don’t expect a bear market any time soon. The macro-outlook lacks sufficient evidence to expect the return of crippling inflationary pressures or enough economic weakness to make a global recession an increased probability,” said Tim Hayes, chief global markets strategist at Ned Davis, in a recent report shared with MarketWatch.

Look for us to continue to trim our international positions and move more to intermediate bonds.

Mike