FORECASTS & TRENDS E-LETTER
By Henry Rohlfs
February 27, 2024

Confidence Crisis or Investment Oasis?

IN THIS ISSUE:

1.  CPI, GDP and Jobs All Rise

2.  Consumer Confidence Slips

3.  But Consumers Like Their Investment Choices

The Conference Board released its latest reading of the Consumer Confidence Index today. US consumer confidence fell in February for the first time in four months as Americans’ views deteriorated about the outlook for the economy, the job market and financial conditions. The crazy part of The Conference Board report is continued confidence by consumers that the stock market will continue its upward trend.

But first, a quick note regarding the release of last month’s Federal Open Market Committee (FOMC) minutes. Officials indicated at their last meeting that they were not in a rush to cut interest rates. No cuts would be coming until the FOMC held “greater confidence” that inflation is “moving down sustainably to 2 percent.”

While the minutes acknowledged the “solid progress” being made, the committee viewed some of that progress as “idiosyncratic” and possibly due to factors that won’t last.

Let’s take a look at the latest macroeconomic indicators and how the FOMC and the stock markets might react.

CPI, GDP and Jobs All Rise

It appears the FOMC’s caution was well-founded. The Consumer Price Index (CPI), a broad-based measure of the prices shoppers face for goods and services across the economy, increased 0.3% for the month, higher than economists forecasted. On a 12-month basis, that came to 3.1%, down from 3.4% in December. Less food and energy prices, the CPI was up 3.9% from a year ago, unchanged from December.

On the bright side, the U.S. labor market has continued to grow, adding 353,000 nonfarm payroll positions in January. First quarter economic data so far points to GDP growth of 2.9%, according to the Atlanta Fed.

On Thursday, the Bureau of Economic Analysis will release its January measure of the Personal Consumption Expenditure (PCE) price index. Bloomberg reports a consensus forecast of 2.8% year-over-year, slightly down from 2.9% in December. The PCE is the Fed’s preferred measure of inflation.

Fed Chair Jerome Powell, in his interview on the CBS show 60 Minutes stated, “With the economy strong like that, we feel like we can approach the question of when to begin to reduce interest rates carefully.” Powell is clearly saying the FOMC does not feel pressured to make a policy change anytime soon. If they could clearly see a recessionary trend – GDP declining or a soft job market – they would then need to consider a small interest rate cut.

The CME Group’s FedWatch Tool now shows a rate cut in March at a near zero probability with the chance of a 25 basis point cut this summer at about 50-50. I still maintain that we will not see rate cuts until late summer or early fall at the soonest.

The only remaining question is whether the Fed will continue its “quantitative tightening” policy. Since June 2022, the central bank has allowed more than $1.3 trillion in Treasurys and mortgage-backed securities to roll off rather than reinvesting proceeds as usual. Chair Powell has mentioned that Fed officials will discuss “balance sheet issues” at their March 19-20 meeting, but don’t expect an end to QT until late this year or early next year.

Consumer Confidence Slips

The Conference Board Consumer Confidence Index fell in February to 106.7, down from 110.9 in January. February’s decline in the Index occurred after three consecutive months of gains. Interesting to note is January’s number was revised downward from a preliminary reading of 114.8. That suggests a somewhat lack of consumer confidence to start 2024 after a significant rise in Q4 2023.

Dana Peterson, Chief Economist at The Conference Board, explained that while consumers are still concerned about overall inflation, “they are now a bit less concerned about food and gas prices, which have eased in recent months. But they are more concerned about the labor market situation and the US political environment.”

The Conference Board survey also showed that consumers are more pessimistic about future business conditions that could lead to a recession in the next 12 months.

On a six-month basis, buying plans for autos, homes, and big-ticket appliances dipped slightly. The share of consumers planning a vacation over the next six months also declined. Expectations that interest rates will rise over the year ahead picked up slightly to 42.7 percent, which may have influenced buying plans.

This is in stark contrast to the University of Michigan’s Index of Consumer Sentiment which jumped nearly ten points in January, continuing a positive trend from its all-time low in June of 2022. It will be interesting to see if the two measures of consumer confidence will reconcile their differences over the coming months.

But Consumers Like Their Investment Choices

I recently heard an interesting interview given by Jim Bianco, President and Macro Strategist at Bianco Research, discussing why Wall Street might be very wrong about rate cuts, inflation and the jobs market. We can see in the news that many on Wall Street are calling for the Fed to cut interest rates sooner than later. But Bianco maintains, “Stocks will continue to soar… and the economy will show no signs of a soft landing. Probabilities are going to continue to deflate about rate cuts.”

He believes the economy will not land at all but continue to move higher. Bianco’s thinking is that the US economy has too much strength for any rate cuts this year at all. He sees inflation as close to bottoming out around 3%, rather than continuing on a steady – or unsteady – trajectory lower.

Higher interest rates and a strong stock market give investors some interesting choices. Investors are able to achieve over 5% annual yield in less risky money market funds. At the same time, this economic news has not stopped a surge in equities as the S&P 500 Index topped 5100 last week.

It’s no surprise The Conference Board also reports that consumers remained upbeat about stock prices over the year ahead.

“We are seeing some really quite unprecedented times, in which macroeconomic data isn’t being considered as seriously as the likes of Nvidia results, which to me is bonkers,” said Lund-Yates. “But that is the world we’re living in now.”

Bonkers indeed. One must remember that the stock market and the economy are not the same.

All the best,

Henry

 

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