Slower Rate Cuts In 2025

Good Afternoon. Happy Holidays! This week was action-packed with the FOMC rate cut decision, which spooked the markets, but the better-than-expected PCE inflation numbers reported on Friday helped recover some of the losses for the week. Below are the key points:

• On Wednesday, the Fed cut rates by 25 basis points to a range of 4.25-4.5% as expected. However, Policymakers now anticipate two rate cuts next year, a significant shift from the four projected in September. Below is the updated dot plot:

  

  Source: The Fed Summary of Economic Projections

• The main reason for this shift in sentiment is the FOMC participants' fear of sticky inflation.

  

  Source: Bloomberg

• The FOMC statement was almost identical to the statement from the previous meeting.

• On Friday, the PCE inflation numbers came better than expected, showing that inflation is moving in the right direction. A week before, the higher CPI numbers painted a different picture. I discussed the differences between PCE and CPI a few times, and CPI generally tends to be higher due to methodology limitations. I am surprised that most news media outlets are indifferent to the two metrics and do not highlight the superiority of PCE. Instead, CPI gets way more media attention. Ultimately, PCE matters most to the Fed. I saw many news stories on inflation going wrong after CPI data last week, but very few after Friday’s PCE release.

• In general, I agree that inflation is sticky and will take time to fall at the 2% Fed target; however, it is expected to be in mid 2’s in 2025. There is a lot of fear of policy shifts under the new administration, but the effects of tariffs take time to show up in inflation. So, it would be premature to say inflation will shoot up in 2025 unless we really experience a policy shock.

• It will be much better if the FOMC meets after the PCE data is released. If the FOMC can push its meeting just by 3 days, it will have more current inflation data to make decisions. The Fed’s official inflation targeting metric is the PCE, so waiting 3 days for the meeting should not be a significant issue. As the CPI gets released ahead of PCE, it gets a lot of media attention, and I am sure this plays in the minds of FOMC members in these situations.

• Overall, the Fed did the right thing by resettling the market expectations:

  • The US economy is still strong

  • The labor market is slowing, but the unemployment rate is well below the historical average and

  • Inflation is moving in the right direction but is sticky and subject to change due to new administration policies.

    Overall, lesser rate cuts make sense based on the available information.

• For the week:

• The S&P 500 is down 1.99%, the Nasdaq is down 1.78%, and the Dow 30 is down 2.25%.

  

  Source: barchart

CNN's Fear & Greed Index now stands at 28 (Fear) out of 100, down 22 points from last week. Details here

The top five trending stocks on Reddit are SPY, Tesla, Nvidia, AMD, and Micro Strategy. Read More

Here is a summary of this week’s key economic releases:

• Data shows that the manufacturing is slowing again after showing good progress last month after a while. After last month's blip, the services sector did the opposite, with better-than-expected PMI numbers. GDP numbers came better than expected, which confirmed the relatively better US economy.

Target Rate Probabilities for Jan 29th FOMC Meeting:

CME FedWatch * Data as of 21 Dec 2024 06:44:18 CT

Rate Cut: The Federal Open Market Committee reduced its overnight borrowing rate to a target range of 4.25%–4.5%, returning it to the level last seen in December 2022. Read

Government Shutdown Averted: The U.S. Senate passed a bipartisan federal spending bill early Saturday, averting a government shutdown and concluding a tumultuous, high-stakes week in Congress. Read

Existing home sales surged: Existing home sales surged in November, marking the largest year-over-year increase over three years, driven by an improved housing supply that expanded options for buyers. November sales rose 6.1% from a year earlier, the biggest gain since mid-2021. Read

CFPB Sues Banks: The Consumer Financial Protection Bureau filed a lawsuit on Friday against the operator of the Zelle payments network and its three primary U.S. bank partners, alleging inadequate investigation of fraud complaints and failure to reimburse victims. Read

Starbucks Strike: Starbucks workers are set to begin a five-day strike on Friday, citing stalled contract negotiations with the company. Initially planned in Los Angeles, Chicago, and Seattle, the strike may expand to hundreds of stores nationwide by Christmas Eve. Read

Immigration Drives US Population Growth: According to new Census Bureau data, immigrants played a pivotal role in U.S. population growth, contributing 84% of the increase in the year ending June 30. This trend, driven by a rise in legal and undocumented arrivals, declining birth rates, and an aging population with elevated death rates, underscores the shifting demographic landscape post-pandemic. Read

Trump Transfers His Stakes: U.S. President-elect Donald Trump has transferred his ownership stake in Trump Media & Technology to a revocable trust, as disclosed in recent securities filings. The transfer includes 114.75 million shares, representing 53% of the company’s outstanding stock, with a valuation exceeding $4 billion based on the last closing price of $35.41. Trump remains the sole beneficiary of the trust. Read

North Korean Hackers Stole $1.3 Billion in 2024: North Korean hacking groups have stolen a record $1.34 billion through cryptocurrency thefts in 2024, highlighting the critical role these illicit activities play in funding Pyongyang. The 47 incidents recorded this year mark a more than twofold increase from the previous year, underscoring their cyberattack's growing sophistication and scale. Read

Micron Beat: Micron's first-quarter revenue met analysts' expectations, while earnings exceeded estimates. However, the company's quarterly revenue and profit forecast fell below Wall Street projections as weak demand for consumer-focused products like PCs and smartphones continues to weigh on its performance. Read

Accenture Beat: exceeded Wall Street expectations for first-quarter revenue and profit, driven by rising demand for its services that assist clients in implementing AI-powered tools. Read

Nike Beat: Nike expects Q3 sales to decline in the low double digits, driven by a strategic refocus on core sports categories and an emphasis on premium pricing. While the company exceeded Q2 revenue and profit expectations, its forward guidance remained muted. Read

Key Points from the Fed Chair in the FOMC Press Conference:

• Chair Powell mentioned that we are closer to the neutral rate, which is the most critical comment. He further clarified that it’s good that we don’t know exactly what the neutral rate is; otherwise, you would be tempted to move in that direction. Multiple models give different results, but we are closer by 100 basis points to that rate. 

• Importance of Core PCE: Powell mentioned that the Fed’s official target is headline PCE inflation, as people feel it in their daily lives. However, the Fed closely examines the core PCE, which removes volatile energy and food prices, which can be affected by reasons other than monetary policy. Hence, core PCE is a better predictor of the future.

• Goods inflation has already come down to the pre-pandemic levels. Housing services inflation has steadily come down, and it’s making progress. Market rents are equilibrating better for new leases. There are recent high readings from non-market housing services, but it’s not an actual number but imputed data. Overall, the Fed thinks inflation is moving in the right direction, and it may take a year or two years for inflation to come down to 2%.

• The labor market is much cooler now. Job creation/hiring is lower than it has been, but it’s steady and not declining. Layoffs are also low. The labor market is cooling, but it's not cooling in a quick way to raise concerns.

• Real wage growth is now higher than inflation.

• We have done a lot to support economic activity by cutting 100 basis points quickly this year. Going forward, we need to see progress on inflation, and we will be moving slower.
   

All Signs Point To Positive Next Week For The Markets:
In general, December is a positive month 74% of the time. This probability is even higher, i.e., 83% in the election year.

Source: Carson

For this month, the S&P 500 is down ~1% and Nasdaq is up ~1%. Considering the historical S&P 500 outperformance in December and the fact that next week is very quiet with no major macro data releases (except unemployment claims on Thursday), the probability of a positive week is very high. I can’t say it for sure but logically I am hoping we will have a positive holiday week.

Gratitude: 
As we are closer to the end of 2024, it's a good time to reflect on the year and stay positive for the future. I wrote about gratitude in my blog in March of this year based on some experiences. I also had one more experience this week that I thought of sharing.

Earlier this week, I bought a new iPad. The salesperson told me she came as a refugee from Myanmar earlier this year. Myanmar has been under military rule for some time now, and she said that there is pressure for all single young men and women to serve in the military, so she left her home. Her parent is still in Myanmar. So, for her, this year is life life-changing. At the same time, I felt so lucky that I never had to go through such a situation. Just being born in the wrong country can make people suffer. So, there is always something to feel happy about in our lives, and I am sure 2024 will have some achievements for all of you. I am not saying we should compare ourselves to the weaker sections of society and feel better about our lives. It’s just the reality check that, irrespective of how this year was; there are always reasons to be grateful for what you have and stay positive for the future.

Please read my blog here. I have recommended a Netflix series and a movie on human struggles and success. Happy watching during holiday time off 😃 

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