FED: DON'T SEE CUTS UNTIL MORE CONFIDENT INFLATION NEARING 2%
In a nutshell · The FOMC voted unanimously to leave benchmark rate unchanged - as expected - in target range of 5.25%-5.5% for fourth straight meeting while making significant changes to statement · However, the statement was very much more hawkish than expected, as The Fed pushed back aggressively against the dovish market stance. Market reaction: -> The 10-year Treasury yield fell more than 7 basis points to 3.98%. The yield on the 2-year Treasury was last down about 8 basis points at 4.27% -> US equity indices are retreating. Gold is paring gains, dollar is recovering. -> Odds of a March Fed rate cut plummet from 47% to 31% after the Fed interest rate decision. Our take: The U.S. economy enters 2024 from a position of strength. For instance, the S&P PMI came in higher than expected last week. Q4 GDP growth in the U.S. came in at 3.3% annualized, well above expectations of 2.0% growth. And while disinflation is firmly in place, the inflation rate remains above the central bank target. There is thus no reason for the Fed to rush. Nevertheless, we still believe they will have to cut rates at some point for the following reasons: 1/ Keeping rates too high for too long can have long-lasting effects on US economic growth 2/ Keeping rates steady while inflation is coming down imply rising real rates. Keeping positive real rates for too long at a time when Uncle Sam is facing $33T debt and surging interest rates payments is unsustainable
US Treasury confirms spending on debt interest now larger than entire Defense Budget.... and will soon surpass entire Social Security budget.
Source: www.zerohedge.com
US government spending (inflation-adjusted) since 2020 has exceeded the combined spending of:
- World War I - World War II - 1970 to 1990 Is this sustainable?
US Bankruptcy filings keep moving higher
This sounds like a logical consequence of 2 years of aggressive FED tightening but still something to keep an eye on Source: Win Smart, CFA
B of A: “.. At the current monthly rundown pace, excess savings should continue to support consumer spending at least through the rest of 2024."
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Liquidity as a key market's driver in one chart -> The stock market's rise mirrors the money supply's growth. Both have risen over 4,500% since 1967
Source: Win Smart, CFA, Game of Trades
Rabobank: "What happens when all of those regional US banks with balance sheets loaded with dubious commercial real estate loans can no longer pledge underwater securities at par?
The answer is more money printing, which explains the price action in the S&P500." Source: www.zerohedge.com, Bloomberg
All the headline numbers have showed that the labor market is incredibly strong
But is it really? Currently, the US has a record ~8.6 MILLION people that are holding 2 or more jobs. Since 2020, nearly 2.6 million people have taken on an additional job. Source: Bloomberg, The Kobeissi Letter
