{"id":52356,"date":"2023-12-03T18:34:04","date_gmt":"2023-12-03T18:34:04","guid":{"rendered":"https:\/\/prosfunds.com\/markets\/we-dont-talk-about-rate-cuts-no-no-no\/"},"modified":"2023-12-03T18:34:05","modified_gmt":"2023-12-03T18:34:05","slug":"we-dont-talk-about-rate-cuts-no-no-no","status":"publish","type":"post","link":"https:\/\/prosfunds.com\/?p=52356","title":{"rendered":"\u201cWe Don\u2019t Talk About Rate Cuts \u2013 No! No! No!\u201d"},"content":{"rendered":"
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The title of this blog was inspired by Disney\u2019s Encanto<\/em>, a story about a family living in a charmed villa in the mountains of Columbia. Cracks begin to appear in the foundation of the grand villa, and it is Bruno, an ostracized family member, who holds the key to stop the foundation from crumbling. The song from the production referred to here is We Don\u2019t Talk About Bruno \u2013 No! No! No!<\/em><\/p>\n

Cracks are beginning to appear in the economy\u2019s foundation as a result of a monetary policy of high interest rates and a shrinkage of the money supply. But the Fed has continued to suggest that rates will remain Higher for Longer<\/em>, i.e.,<\/u> they won\u2019t talk about rate cuts!<\/p>\n

In past blogs we have discussed the issue that the Fed created for itself in 2012 when it decided to become \u201ctransparent,\u201d and began to make public the dot-plots, the individual projections of interest rates by Federal Open Market Committee (FOMC) members, and allowed those members to publicly discuss their individual economic projections and what that would mean for policy.<\/p>\n

Prior to 2012, the Fed never gave guidance of any kind. As a result, market players would look for nuanced clues as to what the Fed was thinking, for example, the thickness of Alan Greenspan\u2019s briefcase. Since the adoption of \u201ctransparency,\u201d the Fed assumed the difficult task of managing market expectations, and it must now be cognizant of any FOMC member comments which might reflect on policy. This was specifically noted by the Financial Times<\/em> on Friday (December 1st<\/sup>) in a story by Colby Smith entitled \u201cFed shies away from talk of interest rate cuts\u201d.<\/p>\n

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The hesitation to officially \u2026 address more directly the parameters for rate cuts, stems in part from fear that doing so could unleash a wave of looser financial conditions.\u201d<\/em><\/p>\n

The fact that FOMC members, in recent public comments, have acknowledged that monetary policy appears to be working (the recent inflation data have come in lower than anticipated) has been interpreted by markets to mean that the peak in interest rates is in, and that the next policy move will be to lower rates. Wall Street\u2019s odds for this have recently moved from a rate cut at the 2024 June 12th<\/sup> meetings to the May 1st<\/sup> conclave. Note in the chart at the top of this blog that the yield on the 10-Yr. Treasury has come full cycle from early September to December 1st<\/sup>. At the Fed\u2019s September meetings, in order to manage market expectations so that financial conditions stayed tight, the Fed emphasized its Higher for Longer<\/em> mantra. And that caused the 10-Yr. Treasury yield to spike from 4.2% to 5.0% by late October. Since then, as inflation has melted and FOMC public comments have acknowledged that additional rate hikes are improbable, 10-Yr. yields have returned to that 4.2% level where they were prior to September\u2019s (Higher for Longer<\/em>) meeting.<\/p>\n

Yet, despite incoming data, this FOMC still believes, or feels it must act like it believes, that the war on inflation hasn\u2019t yet been won, and it wants to keep rates at highly restrictive levels. But the financial markets aren\u2019t cooperating both because the inflation data has come in well below expectations, and because it detects from FOMC member speeches that the Fed is done hiking. Historically, the first-rate cut comes 10 months after the last rate hike which was July 26th<\/sup>. That puts the bullseye on the May 2024 meeting.<\/p>\n

Housing<\/h2>\n

Housing is a key component of the economy, and the news there is not good.<\/p>\n

Pending Home Sales (new contracts) fell -1.5% in October, and this series is down -6.6% from a year earlier. Of significance, its current level is the lowest in the history of the series which began in 2001. This series is the precursor to Existing Home Sales, which are the completed sales contracts.<\/p>\n

Given the chart of Pending Sales shown above, it is no surprise that Existing Home Sales also fell in October (-4.1%) from September levels (and September fell -2.2% from August). October\u2019s number was a 13-year low. Looking back a year, sales are off -14.6%. We are now seeing the beginning of an impact on home prices, as the median sales price was off -0.3%, not much, but a start!<\/p>\n

As noted in prior blogs, because most homeowners have mortgage rates in the 3%-4% range, current mortgage rates (mid-7% range, down from 8% in October) have driven inventories of existing homes for sale to record lows. As a result, those who have the means and desire to purchase have flocked to the New Home market. Even there, it isn\u2019t an easy sell. Note on the chart that new home prices are down more than -17% year over year. That, and some buy down of the mortgage rate, is what it is taking to complete sales in this market. And that -17% is yet another sign that inflation is on the wane.<\/p>\n

Beige Book<\/h2>\n

The Beige Book is a compendium of details about economic conditions in each of the 12 Federal Reserve districts. The latest release was, to say the least, downbeat on the economic climate. Four of the districts said economic growth was \u201cmodest,\u201d while the other eight noted that conditions were flat or slightly down. Unlike recent such reports, no district reported any real economic growth nor any prospect thereof. As far as the immediate prospects for holiday retail sales, the Beige Book reported: rising price sensitivity; increased discounting, and consumer budget consciousness.<\/p>\n

Retail<\/h2>\n

Speaking of holiday retail sales, initial reports from Black Friday and Cyber Monday indicate that there was a significant increase in customers choosing the buy now, pay later<\/em> option when buying online, up 19% from a year ago. This looks to be an indication of some strain showing up in consumer budgets.<\/p>\n

We noted in our last blog that the Challenger, Gray and Christmas employment specialist firm indicated that plans for seasonal holiday hiring is the lowest in a decade, down -40% from that of 2021. This would indicate that retailers are bracing for slow holiday sales. Best Buy
\n BBY
\n <\/fbs-ticker>, Kohl\u2019s, Nordstrom, and Lowe\u2019s all reported slumping same store sales in Q3, signaled no pick-up on the horizon, and cut previous guidance for 2023. According to Rosenberg Research, with all but a handful of S&P 500 companies reporting Q3 results, it says a lot about cracks in the foundation when 72% missed on top line revenue and 59% on earnings.<\/p>\n

Manufacturing<\/h2>\n

The latest Manufacturing PMI Indexes from the Dallas and Richmond Feds both continued to show contraction. Dallas\u2019 was -19.9 in November, and that despite record high energy production in Texas. New Orders, Shipments, Production, and the Workweek all fell from their October levels. And, while Employment was positive (+5.0), it was off significantly from its reading of two months earlier, i.e., September (+13.6). Three of the four inflation markers were more negative in November than they were in October.<\/p>\n