Morning Report: The March Fed Fund futures pare back rate cut bets

Posted on January 22, 2024 by Brent Nyitray

Vital Statistics:

Stocks are higher this morning on no real news. Bonds and MBS are up.

The week ahead will have a couple of important economic prints – GDP on Thursday, and Personal Incomes / Outlays on Friday. The Personal Income / Outlay report contains the PCE Price Index, which is the Fed’s favored measure of inflation. There won’t be any Fed-speak as we are in the quiet period ahead of next week’s FOMC meeting.

The Fed Funds futures are now pricing in a better-than-50% chance that the Fed will keep rates at current levels and not cut. A month ago, it was a 80% chance of a rate cut. The December 2024 futures still envision 150 basis points in rate cuts as the most likely scenario. As inflation continues to fall, a static Fed Funds rate means that real (inflation-adjusted) rates are rising. This could be an impetus for the Fed to cut rates anyway, just to maintain the current level of monetary tightness.

Loan Depot issued an update regarding its cyber security incident from earlier this month. Approximately 16.6 million customers were impacted, and the company is working to restore normal operations. “Unfortunately, we live in a world where these types of attacks are increasingly frequent and sophisticated, and our industry has not been spared. We sincerely regret any impact to our customers,” said loanDepot CEO Frank Martell. “The entire loanDepot team has worked tirelessly throughout this incident to support our customers, our partners and each other. I am pleased by our progress in quickly bringing our systems back online and restoring normal business operations.” The stock is up pre-market, however it lost about 20% on the announcement a couple weeks ago.

The Conference Board’s Index of Leading Economic Indicators fell in December, which signals a weaker economy going forward.

“The US LEI fell slightly in December, continuing to signal underlying weakness in the US economy,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Despite the overall decline, six out of ten leading indicators made positive contributions to the LEI in December. Nonetheless, these improvements were more than offset by weak conditions in manufacturing, the high interest-rate environment, and low consumer confidence. As the magnitude of monthly declines has lessened, the LEI’s six-month and twelve-month growth rates have turned upward but remain negative, continuing to signal the risk of recession ahead. Overall, we expect GDP growth to turn negative in Q2 and Q3 of 2024 but begin to recover late in the year.”

The big drivers of the the decline include the inverted yield curve, dour consumer sentiment, and the ISM indices for new orders. The positive indicators include the stock market and initial jobless claims.

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