• Treasury yields are waffling around unchanged levels this morning as the Fed’s preferred inflation gauge matched expectations, and investors ponder possible tariffs on Canada and Mexico beginning tomorrow. While much is still unknown about the tariff schedule, and whether it will even be enacted, traders are deciding the better part of valor is to hold off taking a stand for now.  Currently, the 10yr Treasury is yielding 4.52%, up 1bp on the day, while the 2yr is yielding 4.21%, also up 1bp on the day.

 

  • We haven’t had a chance yet to comment on the FOMC meeting, so we’ll briefly touch on it here. We had mentioned prior to the meeting that we expected with the level of unknowns: higher inflation trend in the first quarter, fiscal policy uncertainty, and a still solid/decent labor market, that the meeting would deliver a nothing burger and that’s pretty much what we got. While we still see the most likely path being a rate cut around mid-year, we wouldn’t discount the March meeting just yet. If the January and February inflation readings are benign and some softening in the labor market is noted, a rate cut in March becomes a possibility. Now that’s quite the needle to thread, what with the seasonality of higher first quarter inflation, and a labor market showing few signs of weakening, but we wanted to throw that out there as a possibility, albeit one that is pretty low as we sit here today.

 

  • Today we received the Fed’s preferred inflation gauge, PCE, in the Personal Income and Spending report for December. Overall PCE increased from 0.1% in November to 0.3% (0.26% unrounded), matching expectations, as higher fuel costs led the increase. That sent the YoY rate from 2.4% to 2.6%. Core PCE increased from 0.1% in November to 0.2% (0.16% unrounded), as expected, while the YoY rate remained unchanged at 2.8%. The six-month rate, however, moved lower to 2.3%, the lowest in 2024.  The so-called super core ex-housing increased 0.1% which is Fed friendly. While these numbers were part of the first estimate of fourth quarter GDP released yesterday, it does provide a tighter focus on what transpired during December. So, while the increase in inflation was expected, it does set the stage for the first quarter’s inflation reads, which as we mentioned above, tend to run hot, particularly January as firms make annual adjustments to prices and pass along annual wage increases to employees. We’ll see if that trend continued when January CPI is released the second week of February.

 

  • The report also found personal income rose 0.4%, as expected, vs. 0.3% in November and personal spending increased 0.7% vs. 0.5% expected and 0.6% in the prior month. That strong spending level sent the personal savings rate down to 3.8%. As we note below, the fourth quarter GDP was “saved” by the strong showing of the consumer and that is noted here too, in the December spending numbers. While the savings rate is moving lower, that’s been a year-long trend so expecting the consumer to roll over has been a fruitless endeavor so far. The $64,000 question is whether the consumer can continue to shoulder the burden. So far, the answer has been yes.

 

  • Speaking of GDP, the first estimate of fourth quarter GDP surprised to the downside at 2.3% vs. 2.7% expected. The dip lower was mainly attributable to a drop in inventories and business investment while the aforementioned consumer spent at a 4.2% annualized clip, the biggest increase in spending since early 2023. When you back out the one-off items like inventory change, government spending, and net exports, the Real Final Sales to Private Domestic Purchasers was a strong 3.2%, illustrating once again the reliance on the consumer in shouldering the economic burden. It should be mentioned, however, that the big increase in the December goods trade deficit apparently wasn’t in this first estimate of GDP as net exports showed very little movement. We suspect the second estimate, due at the end of February, will have that update which could move GDP lower by a couple tenths, if not more.

 

  • As we mentioned, a softening labor market as one of the prerequisites for a possible March rate cut but the latest weekly jobless claims report continues to show no signs of distress. Weekly claims fell from 223 thousand to 207 thousand bringing the 4-week moving average down to 212.5 thousand, a nine-month low. Meanwhile, continuing claims fell from 1.902 million to 1.858 million. This data coincides with the survey week for January’s nonfarm payroll report, so the early indications are for another decent/solid jobs report.

 

  • Finally, the most comprehensive look at wages and benefits was released this morning for the fourth quarter with the Employment Cost Index increasing by 0.9%,matching expectations and a tenth higher than the 0.8% third quarter increase. Annualized, this puts wage growth at 3.8% for 2024 which is close to the levels seen in the employment report. While it’s above the long-term average of 3.0% it continues a moderating trend from earlier in the post-lockdown surge in wages (2023 wage growth was 4.3%) and should ease worries at the Fed about wage-price spirals.

 Core YoY Rate Unchanged at 2.8% While 6-month and 3-month Averages Moved LowerSource: BEA


Personal Income and Spending (MoM)


Personal Savings Rate Declines Again as Consumer Spending Outpaces Income


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Published: 01/31/25 Author: Thomas R. Fitzgerald