Broker Check

Weekly Market Update March 1, 2024

March 02, 2024

Fed Funds 5.25% - 5.5%, US Ten Year 4.186%, Oil $80.00

The Federal Reserve may attain its “soft landing” for the economy that many have long considered a long shot. The Fed’s favorite measure of inflation, the Personal Consumption Expenditures, or PCE, price index rose 0.3% in January, in line with forecasts, while the 12-month headline inflation rate eased to 2.4%, matching estimates. The core PCE price index, which takes out the more volatile food and energy prices, rose 0.4% in January, with the 12-month inflation rate easing to 2.8% vs. 2.9% in December. (Given how food and energy are the most indispensable goods for the typical American, I have never understood why there is a “core” number. The cost of living is the cost of living. Who does not eat or use energy for heating, cooling, and transportation? Perhaps the extra measure keeps statisticians busy.)

On the employment front, new claims for jobless benefits rose to 215,000 in the week ending February 24, up from the previous week’s 202,000. However, the four-week average of claims fell by 3,000 to 215,000. With inflation expectations of 2.5% and unemployment rising modestly to 4% by the start of the fourth quarter, the odds of a Fed rate cut on June 12 now stand at 65%. Markets are pricing a year-end Fed Funds of 4.54%, after three rate cuts. The latest market expectations for interest rates and unemployment are below.

Inflation’s effects on interest rates and on the financial markets are our focus. For equities, current expectations support better relative performance for fast-growing information technology stocks. Falling rates should help higher-yielding stocks such as utilities, for two reasons; their dividends will once again become competitive with money market rates, and their borrowing costs will decline as utility companies use borrowed money. Lower rates also aid consumer discretionary stocks, reducing the cost to consumers to finance large purchases like automobiles and major appliances, and for vacations, including travel, lodging and entertainment. Do not forget bonds. As rates fall bonds will rise in price, and it may be wise to extend maturities out past one year.

Wishing You a Profitable Week,