All Things in Moderation

Vital Statistics:

Stocks are flattish this morning after suffering a couple tough days to open the year. Bonds and MBS are down.

The FOMC minutes indicated that the Fed isn’t quite yet worried about flagging economic growth. Their main focus continues to be inflation, not growth. That said, they do see it appropriate to move the Fed Funds rate lower towards the end of the year.

Participants judged that the current stance of monetary policy was restrictive and appeared to be restraining economic activity and inflation. In light of the policy restraint in place, along with more favorable data on inflation, participants generally viewed risks to inflation and employment as moving toward greater balance. However, participants remained highly attentive to inflation risks…In discussing the policy outlook, participants viewed the policy rate as likely at or near its peak for this tightening cycle, though they noted that the actual policy path will depend on how the economy evolves…In their submitted projections, almost all participants indicated that, reflecting the improvements in their inflation outlooks, their baseline projections implied that a lower target range for the federal funds rate would be appropriate by the end of 2024. Participants also noted, however, that their outlooks were associated with an unusually elevated degree of uncertainty and that it was possible that the economy could evolve in a manner that would make further increases in the target range appropriate. 

In terms of inflation, they generally view the supply chain issues to have been worked out. They see shelter inflation working its way lower as rents continue to weaken. Services inflation less shelter, which is largely driven by wage inflation is still elevated.

The Fed Funds futures have begun to take down the probability of a rate cut at the March FOMC meeting. A week ago, we were looking at a 86% chance of a rate cut, while we are now looking at 71% chance.

Bond market volatility has yet to meaningfully work its way lower, which is keeping mortgage spreads elevated. That said, we are starting to see MBS spreads tighten a touch. We are nowhere back to pre-tightening levels however spreads are still close to historical records. We could easily see 125 basis points in lower rates if spreads revert to long-term historical levels. That would imply mortgage rates in the low 5% level even without lower 10 year yields.

The economy added 164,000 jobs in December, according to the ADP Employment Report. “We’re returning to a labor market that’s very much aligned with pre-pandemic hiring,” said Nela Richardson, chief economist, ADP. “While wages didn’t drive the recent bout of inflation, now that pay growth has retreated, any risk of a wage-price spiral has all but disappeared.”

Leisure / Hospitality led the increase in jobs, adding 59,000 which was followed by education / health services at 42,000 and construction at 24,000. This number is a touch higher than the Street expectation for payrolls in tomorrow’s Employment Situation Report.

Wage growth continued to decelerate, rising 5.4% for job stayers and 8% for job changers. The deceleration started over a year ago.

Announced job cuts fell to 34,817 in December, according to outplacement firm Challenger, Gray and Christmas. “Layoffs have begun to level off, and hiring has remained steady as we end 2023. That said, labor costs are high. Employers are still extremely cautious and in cost-cutting mode heading into 2024, so the hiring process will likely slow for many job seekers and cuts will continue in Q1, though at a slower pace,” said Andy Challenger, workplace and labor expert and Senior Vice President of Challenger, Gray & Christmas, Inc.

In 2023, tech companies announced the most job cuts (probably as the era of free money disappeared). Retail was next. Health care and financial industries also announced a lot of cuts in 2023.

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