As we enter 2024, the financial markets remain in a state of anticipation, closely monitoring the evolving thought process of Federal Reserve officials on inflation and interest rates. Recent comments from Fed members, particularly Raphael Bostic and Michelle Bowman, indicate a shift in perspective, hinting at a potentially more dovish stance in the near future.
The Fed’s Changing Tone
Michelle Bowman’s Evolving Thoughts
Michelle Bowman, known for her hawkish views, recently surprised the markets with her statement that her thought process on inflation has “evolved.” Previously an advocate for multiple rate hikes, Bowman’s new stance suggests a possibility that further rate hikes may not be necessary to bring inflation down to the Fed’s 2% target. This shift is significant, signaling a potential easing in the Fed’s aggressive monetary policy approach.
Raphael Bostic Echoes Similar Sentiments
Raphael Bostic, the Atlanta Fed President, echoed Bowman’s sentiments, indicating a similar shift in thinking. However, both officials cautiously noted that additional rate hikes are partially off the table, a common stance expected from Fed officials.
Market Anticipation and Inflation Data
Currently, the market anticipates two scenarios for 2024: a continuation of the current interest rate policy or the possibility of five quarter-point rate cuts. This forecast largely depends on upcoming key inflation data, particularly the Consumer Price Index (CPI) numbers due for release.
Our December CPI analysis suggests a potential easing of inflationary pressures. We predict a rise of about 2/10 of a percent in the headline CPI, slightly better than the market consensus. However, the core CPI, which excludes food and energy, is expected to drop to 3.8%, thanks to a significant component – shelter, which accounts for 44% of the index.
Factors Influencing the Inflation Outlook
With its high replacement from last year, the shelter component is expected to show progress, contributing to a drop in the year-over-year inflation number.
Additionally, declining oil prices and used car values, as reported by Mannheim and CarGurus, are likely to aid in curbing inflation further.
Housing Market and Small Business Optimism
The housing market, a critical sector of the economy, is showing signs of recovery. The overall index has seen a significant increase, especially in buyer activity, which signals a turnaround and potential expansion in the housing market.
The NFIB Small Business Optimism Index, despite being below the 50-year average, has shown an increase. However, the decline in plans to hire and increase inventory might indicate a softening labor market and consumer weakness, potentially impacting future GDP numbers.
The reliability of employment data remains a key factor in assessing the economic outlook. Accurate employment figures are crucial for understanding labor market dynamics and their impact on the broader economy.
Mortgage-Backed Securities and Treasury Yields
As we observe in the financial markets, mortgage-backed securities are relatively flat, while the 10-year Treasury yield hovers around 4%. The technical analysis shows a triple layer of resistance, suggesting a potential cap on rising yields.
If upcoming inflation numbers are favorable, we might see a downward trend in yields and an upward movement in bond prices, offering a respite to the markets.
As we navigate through 2024, the evolving stance of the Federal Reserve and upcoming economic data will play pivotal roles in shaping market dynamics. The cautious optimism expressed by Fed members like Michelle Bowman and Raphael Bostic, coupled with our analysis of inflation and housing data, suggests a potential easing of inflationary pressures, which could lead to a more favorable economic environment in the near future.
