Holbrook Insights

The Fed hiked rates again but expectations have shifted. This is despite the Fed’s call for rates to remain at their current level until inflation can approach its target. Investors speculated that this could be the last hike of the cycle. Meanwhile, Powell said additional “firming” of policy could be warranted.

The week kicks off Wednesday with the Consumer Price Index report for March. Headline and core retail sales are set to decline, which would mark two months in a row with declining sales. Thursday will see the release of the Producer Price Index report for March. Headline and core producer inflation is set to slow, with economists calling for no change in headline prices after a modest decline in February.

Finally, the retail sales report and University of Michigan consumer sentiment survey will be published on Friday. Headline and core retail sales are set to decline in March, which would result in two consecutive months with declining sales. The first estimate for consumer sentiment in April is expected to show a modest uptick in confidence, which would be a good sign for future consumer spending growth.

The S&P 500 rose for the third week in a row as investors shake off banking jitters. Treasuries sold off as investors revisited equities in the last week of the quarter.

The week will kick off on Monday with the IS M manufacturing report for March. The index is expected to fall to 47.5, which would leave it in contractionary territory. 

The Fed hiked rates again but expectations have shifted. This is despite the Fed’s call for rates to remain at their current level until inflation can approach its target. Investors speculated that this could be the last hike of the cycle. Meanwhile, Powell said additional “firming” of policy could be warranted.

Tuesday’s reports will contain the Conference Board Consumer Confidence Index for March and retail inventories for February. Economist forecasts call for slightly lower consumer confidence in March, partially due to concerns about the health of the banking system. Retailers will continue to manage through their buildup from the end of 2021.

Thursday will see the release of core personal consumption expenditures, the Fed’s preferred inflation gauge. Finally, personal income and personal spending reports for February will be published on Friday. They are expected to show a solid 0.3 percent increase for income and spending in February after better-than-expected spending growth in January. 

Inflation eased on both the consumer and producer this month. Despite the easing, core consumer inflation remains elevated at 5.6 percent, driven by elevated prices in housing.The retail sales report continues to reflect a consumer shift from goods to services. Food services and drinking places drove the increase in sales while auto and furniture sales slipped. Today’s reports will contain existing home sales for February. Existing home sales are expected to pick up modestly. If estimates hold, this would mark the first month with sales growth since January 2022. 

Tomorrow will see the FOMC rate decision. Economists and investors will be closely monitoring the release for hints on the future path of monetary policy. Thursday will include weekly initial jobless claims, which are being monitored for softening in employment. Finally, the preliminary durable goods orders report for February will be published on Friday. Headline orders are set to rebound following a transportation-driven slump in January while core order growth is expected to slow. 

This month marks one year since the Federal Open Market Committee (FOMC) began its unprecedented rate hiking journey and, although the grip has loosened, inflation still has its talons in the U.S. economy. January proved to be a headache for Federal Reserve (Fed) officials as progress on cooling inflation slowed, spending was stronger than expected, and the job market continued to run hot. As we approach the March 22 FOMC rate decision, the question still stands as to how this data will develop and affect policy moving forward. “It could be that progress has stalled, or it is possible that the numbers released last month were a blip, perhaps associated with unusually favorable weather, and that forthcoming data will show that economic activity and inflation resumed their decline” explained Fed Governor Chris Waller. “On the other hand, if those data reports continue to come in too hot, the policy target range will have to be raised this year even more to ensure that we do not lose the momentum that was in place before the data for January were released.” U.S. Treasury yields saw modest increases last week. The 2-year, 5-year, 10-year, and 30-year gained 6 basis points (bps) (to 4.88 percent), 7 bps (to 4.29 percent), 7 bps (to 4.02 percent), and 3 bps (to 3.96 percent), respectively. 

Last week’s data focused on the consumer and business confidence, kicking off with the release of durable goods orders on Tuesday. Headline durable goods orders fell more than expected in January due to a slowdown in volatile transportation orders. Core durable goods orders, on the other hand, increased more than expected.Tuesday saw the release of the Conference Board Consumer Confidence Survey for February. Consumer confidence declined modestly during the month because of souring consumer expectations for the future. The increased consumer pessimism was largely due to expectations for fewer available jobs and lower income ahead. 

This week will be lighter on the data front with two key reports set to be released. Wednesday will see another sentiment report in the release of the international trade report for January. The monthly trade deficit is expected to increase modestly in January for the second consecutive month. Finally, the week will wrap on Friday with the employment report for February on Friday. Economists expect to see a strong 200,000 jobs added in February, following a larger-than-expected increase in January.

The next Federal Open Market Committee (FOMC) rate decision is roughly one month away (March 22), and market participants will pay close attention to economic releases between now and then. Recent indicators point to an energetic economy in the U.S., leading to questions about where the Federal Reserve (Fed) will take rates from here. With the unemployment rate resting at a 53-year low, retail sales showing resilience and notching their biggest monthly gain in nearly two years, and January’s inflation numbers showing a bit more heat than expected, conditions seem supportive of further rate hikes. Although current market pricing largely shows the expectation for a 25 basis point (bps) hike in March, strong economic reports have led markets to price in a growing likelihood of a 50 bps hike. U.S. Treasury yields rose across the curve last week. The 2-year gained 17 bps to 4.69 percent, the 5-year grew 19 bps to 4.11 percent, the 10-year added 4 bps to 3.7 percent, and the 30-year increased 8 bps to 3.82 percent.

Wednesday had multiple releases, with Retail Sales and Industrial Production for January alongside the February National Association of Home Builders Housing Market Index. Retail sales rebounded after two months of declines to end 2022. The rise in headline sales was partially supported by rising gas prices during the month; however, core sales, which exclude auto and gas sales, also increased more than expected. Industrial production was unchanged, due in part to unseasonably warm weather that lowered heating demand. Manufacturing output, on the other hand, increased 1 percent. Home builder sentiment increased modestly in February, marking two months with improved confidence to start the year. The index nonetheless sits well below post-pandemic highs from 2020 and 2021, indicating continued headwinds for the industry. 

Tuesday will see the release of the Existing Home Sales report for January and FOMC Meeting Minutes from January. Existing home sales are again expected to decline, which would mark 12 straight months with declining sales. Following last week’s Consumer Price Index and Producer Price Index reports, economists and investors will closely monitor the release of the meeting minutes for hints on the path of monetary policy. Finally, the week will wrap on Friday with the release of Personal Income and Personal Spending reports for January, which are expected to show a rebound in spending and continued income growth to start the year.

Rates continued their move higher last week as several Federal Reserve (Fed) members, including Chairs Powell, Kashkari, and Waller indicated there was potentially “more work to do.” U.S. Treasury yields were up last week, with the 2-year, 10-year, and 30-year increasing 42 basis points (bps) (to 4.51 percent), 34 bps (to 3.74 percent), and 30 bps (to 3.82 percent), respectively. 

Last week was light on data. Tuesday saw the release of the international trade report for December. The trade deficit widened less than expected in December. Imports increased by 1.3 percent, while exports fell 0.9 percent. 

This week will be another busy one in terms of economic data. Tuesday will see the release of the Consumer Price Index report for January. Headline consumer prices are set to rise in January following a modest decline in December. On a year-over-year basis, consumer inflation is expected to decelerate to start the year. On Wednesday, retail sales, industrial production, and the National Association of Home Builders Housing Market Index are all set to be released. Retail sales are set to rebound in January following a decline in December. Part of the anticipated increase is due to rising gas prices during the month; however, core sales are also expected to grow, indicating healthy levels of consumer demand. Industrial production is expected to improve, supported by rising manufacturing output. Home builder confidence is expected to increase modestly in February following a larger-than-expected increase in January. 

The Federal Reserve (Fed) increased its policy rate by 25 basis points (bps) at last week’s Federal Open Market Committee (FOMC) meeting, bringing the target range between 4.5 and 4.75 percent. This marks a slowdown in pace for the Fed’s rate hikes, but Chairman Jerome Powell aimed to avoid giving any indication that the job was close to done. “Inflation data received over the past three months shows a welcome reduction in the monthly pace of increases,” Powell said in his post-meeting press conference. “And while recent developments are encouraging, we will need substantially more evidence to be confident that inflation is on a sustained downward path.” While acknowledging that, “We can now say, I think for the first time, that the disinflationary process has started,” he went on to note that it would be “very premature to declare victory or to think we really got this.” U.S. Treasury yields changed modestly over last week. The 2-year and 5-year gained 2 bps to (4.2 percent) and 6 bps (to 3.66 percent), respectively. The 10-year and 30-year fell 12 bps (to 3.39 percent), and 8 bps (to 3.54 percent).

Last week was a busy one in terms economic policy and releases. Tuesday saw the release of the Conference Board’s Consumer Confidence Index for January. Consumer confidence declined modestly during the month, but the index remained well above the recent low of 95.3 that it hit in July 2022. Consumer views on the present economic situation improved to start the year; however, souring expectations lead to a headline decline for the index.

This week will be on the lighter side in terms of economic data. Tuesday will see the release of the trade balance and consumer credit reports. The monthly trade deficit is expected to widen in December following a larger-than-expected tightening in November. Finally, the week will wrap Friday with the University of Michigan consumer sentiment survey. Consumer sentiment is expected to increase modestly, which would mark three consecutive months of improving confidence.

The future path of interest rates is uncertain for 2023, but according to Bloomberg’s economic forecast, the average Bloomberg surveyed economist expects to see another half percent of increases in the first quarter of the year before levels remain stable through the second and third quarters. The Federal Reserve (Fed) is scheduled to announce its next rate decision this week, on Wednesday, February 1. Consensus expectations are pointing to a 25 basis point (bp) increase. Some analysts, however, aren’t ruling out a more hawkish 50 bps hike as recent indicators have shown easing financial conditions and softening inflation. Fed Chair Powell’s post-meeting press conference will be closely monitored for forward guidance to get a better sense of how high rates are expected to go and for how long. Since markets have been pricing in 2023 rate cuts despite Fed officials’ rebukes of such expectations, Powell will likely tread carefully and avoid giving any signals that the Federal Open Market Committee’s (FOMC) foot may come off the inflation-fighting pedal anytime soon. U.S. Treasury yields were up modestly last week. The 2-year, 5-year, 10-year, and 30-year gained 6 bps (to 4.21 percent), 11 bps (to 3.64 percent), 7 bps (to 3.55 percent), and 2 bps (to 3.68 percent), respectively

Last week’s data focused on overall economic growth as well as personal spending and income. Thursday saw the release of the advanced estimate of fourth-quarter GDP. The fourth-quarter GDP report showed that the economy grew more than expected. Personal consumption slowed during the quarter, although the 2.1 percent annualized increase in consumption to end the year was still solid on an historical basis. Also released on Thursday was durable goods orders data. Headline and core durable goods orders both came in above expectations to end the year. The surge in headline orders was largely due to a spike in volatile transportation orders.

This week will be a busy one in terms of economic policy and releases, starting with the release of the Conference Board Consumer Confidence Index data for January on Tuesday. Economists expect to see slightly better consumer confidence in January. Wednesday will see the FOMC’s federal funds rate decision. The Fed is expected to hike the federal funds rate by 25 bps at its February meeting, as the central bank aims to slow the pace of rate hikes in 2023. Also out on the same day will be the ISM Manufacturing index report for January. Manufacturer confidence is expected to decline modestly and remain in contractionary territory to start the year

The Nasdaq Composite outperformed the Dow Jones Industrial Average last week as growth equities outperformed value equities. The outperformance of the Nasdaq was due to the drop in Treasury yields on the back of weaker-than-expected retail sales for December and softer-than-expected inflationary data in the form of the Producer Price Index (PPI). The PPI, which measures the average change over time in the selling prices received by domestic producers, fell 0.5 percent in December versus 0.1 percent expected. As a result, the economy showed hints of slowing faster than expected and fueled hopes that the Fed will ease the magnitude and pace of its rate hikes in 2023. The falling Treasury yields translate into a lower cost of capital for communication services, energy, technology, and consumer discretionary, which all outperformed. Industrials, utilities, and consumer staples lagged.

As the Federal Open Market Committee (FOMC) enters the quiet period leading up to its next policy meeting (January 31–February 1), the average Bloomberg surveyed economist expects to see another half percent of increases in the first quarter before levels remain stable through the second and third quarters. Inflation data has shown recent signs of softening, but Federal Reserve (Fed) officials will require more convincing signs before there are any serious conversations about stopping its cycle. Fed Governor Lael Brainard explained, “Even with recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2 percent on a sustained basis.” Still, as we approach the February 1 FOMC rate decision, futures markets are confidently pricing in a smaller hike of 25 basis points (bps). This marks a significant downshift after a string of four 75 bps hikes and one 50 bps hike in 2022. Speaking to the possibility of a quarter percentage point hike, Brainard noted, “This will enable us to assess more data as we move the policy rate closer to a sufficiently restrictive level, taking into account the risks around our dual-mandate goals.” U.S. Treasury yields didn’t see much movement last week. The 2-, 5-, and 10-year were down 7 bps, to 4.17 percent, 3.54 percent, and 3.44 percent, respectively. The 30-year ended 1 bp lower at 3.6 percent