The Fed released its policy statement on Wednesday with no change to rates, as expected. However, the presser was more revealing as Powell said that a March cut was not going to happen. A very frank statement that you rarely get from the Fed Chair as he seems to be making his best efforts to thwart the market’s expectations.
The Fed Chair also knows that markets can get ahead of reality. As you can see in the graphic above, the rates markets were trading as though a March rate cut was nearly an 80% probability just one month ago. After the meeting, many economists began pushing out their projected rate cuts to May and June and some are now questioning the rationale for cuts when the jobs number on Friday was so strong.
The Implication of the Jobs Report
The 353,000 jobs added in January was the strongest in a year according to the Labor Department. To add to the good news, the December payroll number was revised upward to 333,000 from 216,000.
No sign here that interest rates are cooling the job markets which again makes the argument for keeping rates at their current levels. At this point, the economy will need to fall off a cliff in the next 90 days to see rate cuts in May or June. And if we don’t see anything by the summer months then it is likely we don’t see any policy changes until after the Presidential election.
However, 2025 may be a different story as higher rates will cause pain in refinancing corporate (high-yield) and commercial real estate debt. As a reminder, there was bad news this week from New York Community Bank and Aozora Bank (Japanese) – both stated that US commercial real estate exposures are causing losses to pile-up. In reaction to the news, their stock prices had massive drawdowns.
This is likely the tip of the iceberg as most commercial real estate properties will see their interest rates double when they refinance and that is not good for property owners (and their lenders). Not to mention, there is a large amount of corporate debt to be refinanced in the next three years. So maybe rate cuts become a priority in 2025. And don’t forget the Federal Government is running massive deficits and that will eventually add to inflation pressures.
Checking in on the 10Yr Treasury Yield
This week, 10Yr yields fell to 3.81% coming into the Fed meeting and reversed sharply higher to close at 4.03%. I think the next move will be up to 4.5% before retreating below 4% again later this year. Ultimately, the 10Yr is the best barometer to watch for inflation and growth and I expect it will be closely watched by investors in the coming year. If we see the 10Yr yield plummet later this year then it is likely something is going wrong with the economy.
So far, the stock market has held up but it looks extended and needs some rest. I will have some stock market charts next week for you to review.
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Paul J McCarthy III
President, Kisco Capital