Fourth-quarter GDP and consumer spending were both stronger than expected. Yet some analysts moved up the pace of Fed rate hikes. I went the other way, and so did the market.
To answer the question asked, rate cut odds went down slightly today from 49.1 percent to 47.4 percent.
This is the direction I expected based on the data. I went to CME Fedwatch to check after seeing a string of Tweets today expecting the opposite.
Diane Swonk
Warning Sign
I see the data as a big warning sign. Consumers are spending recklessly and using debt, especially credit cards to do so.
The market interpretation is closer to mine.
A month ago, the market expectation was 83.3 percent for at least one rate cut by March. Today, it’s only 47.4 percent.
Weighted Average CME Interest Rate Projection
Peak Rate Cut Odds
Rate cut expectations peaked in December.
In the past month, the market has taken away one rate cut for next year. Data has been stronger than expected and some Fed presidents have warned not to count on rates.
Increase in Real Spending Rose 5 Times the Increase in Real Disposable Income
Spending and price indexes from the BEA, annotations and highlights by MIsh.
Earlier today I noted the Increase in Real Spending Rose 5 Times the Increase in Real Disposable Income
Consumers went on a spending spree in December, dipping into savings or borrowing to do so.
4th Quarter GDP Up a Strong 3.3 Percent
Strong spending fueled fourth-quarter GDP.
For discussion, please see 4th Quarter GDP Blows Past Consensus, Up a Strong 3.3 Percent
Debt Soaring Out of Sight
GDP is fueled by both consumer debt and government debt. Regarding government debt, Republicans are in on the deal.
For example, The GOP Supports a Child Tax Credit Boost and Affordable Housing Expansion
Without passing anything but continuing resolutions, we went from a House Speake Kevin McCarthy’s proposal of $1.471 trillion bill to Mike Johnson’s $1.66 trillion bill that does not include, Ukraine, Israel, or the US border with Mexico.
Fueled by Debt
Total consumer credit, revolving credit, and credit card interest rates all hit new record highs in November.
Consumer Credit Hits Record $5 Trillion
For discussion, please see Retail Sales Surge 0.6 Percent, Beating Economist’s Expectations
Also see How Did Covid Change Your Propensity to Buy Things Online?
Consumers keep spending more and more, and much of that spending is online.
Should the Fed Declare Victory?
Some people want the Fed to declare victory already, despite Core PCE inflation running at 2.9 percent year-over-year.
Two days ago former Fed economist Claudia Sahm said the Fed should cut now.
I said, how about waiting for the data.
For discussion, please see Hoot of the Day, What is the Fed Waiting On?
GDP and spending data was stronger than expected. There is no reason for the Fed to rush into rate cuts and many reasons not to.
Consumer spending is up because house price appreciation is making many people feel flush. You can’t compare only to disposable income.
“Affordable Housing Expansion” Along with other debts it seems we’re headed for another subprime meltdown.
The question should be will those things affect the 3month T-bill rate, because that precedes Fed action almost every single time. And it’s the same rate, give or take a couple basis points, today as in October, so no change coming thus far. Prove it by superimposing Fed Funds rate on the 3-mo chart. So if you don’t check the 3m rate, go on guessing. Or set an alarm for any changes.
Excellent analysis. Spending outpacing deposable income growth by five times seems like a train wreck just around the bend. How long this magical levitation can last? Who knows.
Long-term money flows may finally turn negative in the last half of 2024.
Rates wont be cut substantially till it is clear Biden has wont the election. Zero percent rates will come back as there is no other way we can pay the interest on all the (government) debts.
It’s very curious how stubborn the rate cut expectations have been, and still are. How many times has Powell said “Higher For Longer” and more recently he upped that to “above trend growth could mean HFL” and yet everyone thinks the days of being a drunken sailor on free credit are tomorrow or the next day. Wackadoos.
The magician augurs the entrails of a goat for the king. After the king leaves the magician eats the goat. Q.E.D.
How does efforts to shut down farming in Europe impact the prospect of deflation?
Off topic but does anyone have bond suggestions in the energy space? Talos Energy and Vital Energy have been calling in their bonds as of late. Vital still has a 1/15/2028 bond with a 10.125% coupon but too much of a premium now.