Morning Report: The Fed declines to telegraph imminent rate cuts

Posted on February 1, 2024 by Brent Nyitray

Vital Statistics:

Stocks are higher this morning after the Fed maintained interest rates at current levels. Bonds and MBS are up.

As expected, the Fed maintained the Fed Funds rate at its current level of 5.25% – 5.5%. They didn’t really indicate that rate cuts are imminent at the March meeting:  “In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

The big driver of inflation remains shelter:

If the Fed cuts rates, it risks a re-ignition of inflation as mortgage rates fall and home prices rise. We do have a record number of apartments under construction, and that should put downward pressure on the rental component of shelter inflation.

New York Community Bank (the parent of Flagstar) fell 38% yesterday on a loss and dividend cut. The company also acquired Signature Bank last year during the regional banking crisis. It boosted its provision for loan losses, and the Street is taking this quarter as sort of a “kitchen sink” earnings release – which is when a company that is reporting bad news decides to release everything negative all at once. This often supports better earnings going forward. That said, the dividend cut was bad news.

In other economic news, nonfarm productivity rose 3.2% in the fourth quarter and unit labor costs rose 0.5%. This is good news for inflation. Initial Jobless claims rose to 224k, indicating that the labor market is cooling.

Announced job cuts surged in January, according to outplacement firm Challenger, Gray and Christmas. “Waves of layoff announcements hit US-based companies in January after a quiet fourth quarter. As we step into 2024, the landscape is shaped by stabilizing prices and the anticipation of falling interest rates. It is also an election year, and companies begin to plan for potential policy changes that may impact their industries. However, these layoffs are also driven by broader economic trends and a strategic shift towards increased automation and AI adoption in various sectors, though in most cases, companies point to cost-cutting as the main driver for layoffs,” said Andrew Challenger, Senior Vice President of Challenger, Gray & Christmas, Inc.

The financial sector was a big contributor to the increase:

The manufacturing economy improved in January, although we are still in contractionary territory. “Demand remains soft but shows signs of improvement, and production execution is stable compared to December, as panelists’ companies continue to manage outputs, material inputs and labor costs.”

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