February 5, 2024
The S&P 500 Index declined intra-week due to hawkish Federal Reserve comments, but rallied Friday to close at a new high. For the week, the S&P 500 Index was +1.4%, the Dow was +1.4%, and the NASDAQ +1.3%. The S&P 500 Index was led by the Consumer Discretionary, Communication Services, and Consumer Staples sectors, while the Energy, Real Estate, and Technology sectors lagged. The 10-year U.S. Treasury note yield decreased to 4.031% at Friday’s close versus 4.160% the previous week.
The Federal Open Market Committee (FOMC) indicated it would need to see more progress on reducing inflation before it would be appropriate to lower the Fed funds rate. Fed Chair Jerome Powell was on 60 Minutes over the weekend to reiterate this stance. CME Fed funds futures currently indicate 84.5% probability that the committee keeps rates the same at the March FOMC meeting and that there is a 55.8% probability the first reduction in rates comes at the May meeting. The first new data following the meeting showed the labor market is still strong with 353,000 net new jobs created in January versus an expectation of 185,000.
Fourth quarter earnings reports continue this week with 76 companies in the S&P 500 Index scheduled to report earnings. Current fourth quarter expectations for the S&P 500 Index are earnings growth of 7.8% and revenue growth of 3.1%. For full-year 2023, S&P 500 Index earnings are expected to grow by 3.6% with revenue growth of 2.1%. For full-year 2024, earnings are expected to grow by 9.9% with revenue growth of 4.8%.
In our Dissecting Headlines section, we look at the shift in expectations for rate interest rate cuts.
Financial Market Update
Dissecting Headlines: Keen Interest
After a steep increase in the Fed funds rate in 2022 and 2023, the FOMC hasn’t raised interest rates since last July. The committee also indicated in its December 2023 Summary of Economic Projections that the Fed funds rate could decline by 0.75% in 2024. The key question has been “When?”.
Jerome Powell has been consistent in his commentary that progress on inflation is the key metric the FOMC is working with. The data point for this is the Core Personal Consumption Expenditures (PCE) Price Index, which is the PCE excluding the impact of food and energy prices. The most recent reading on this index was 2.9% year-over-year growth in December and 0.2% month-to-month growth. He has stated the FOMC doesn’t need to see year-over-year core inflation at 2.0%, but that the committee needs confidence that core inflation is on track to return to 2.0% over time and that they won’t need to wait until it is at the 2.0% level to lower the Fed funds rate.
Investors were keen to see a 0.25% reduction for the Fed funds rate at the March FOMC meeting, but a combination of hawkish comments, or at least a lack of dovish comments, at the January FOMC meeting combined with a strong January employment report has pushed out those expectations to May. Chairman Powell has consistently said the FOMC will be data dependent. Between now and the March 20th meeting, we will see data on the Consumer Price Index (CPI) and Producer Price Index (PPI) for both January and February, the January PCE Price Index, and the February Employment Situation Report.
Chairman Powell said on 60 Minutes over the weekend that , “it’s not likely that this committee will reach that level of confidence (to lower interest rates) in time for the March meeting”. What the FOMC will do is issue an updated Summary of Economic Projections at the March meeting and that should update their assessment as to whether a rate decrease in May is appropriate. Current investor expectations for a May rate decrease have a 55.8% probability. That view is likely to shift around as data on inflation and employment is released over the next seven weeks and solidify following the March FOMC meeting and issuance of the updated economic projections.