Review the latest Weekly Headings by CIO Larry Adam.
Key Takeaways
- Watching the Fed and quarterly refunding update
- The pace of job gains should continue to slow
- Tech earnings next week will be in the limelight
This week marks the 100th anniversary of the Winter Olympics. In 1924, athletes from around the world gathered in Chamonix, France to compete in five different winter sports – ranging from skiing, snowboarding, bobsledding, ice hockey and the much-loved figure skating competition. Over the years, the Winter Olympics have grown to be one of the world’s biggest sporting events, with over 2 billion viewers tuning in to watch! And while there are no Winter Olympics this year (the next one is in Italy in 2026), we will have our own version of financial Olympics next week with the Federal Reserve (Fed) meeting, Treasury’s quarterly refunding announcement and Tech earnings. With investment spectators looking on, these events will be pivotal in shaping our views going forward. Here’s what we’ll be watching:
- The Fed and quarterly refunding update | Fed policymakers are expected to hold policy rates steady at next week’s FOMC meeting; however, rate cuts are still on the horizon. But with economic growth humming along (Atlanta Fed 1Q24 GDP is running at a 2.4% pace) policymakers do not appear to be in a rush to cut rates as quickly or aggressively as the market expects. After several Fed members pushed back against the market’s overly optimistic expectations, the probability of a March rate cut has receded – with the market only expecting a ~48% chance of a 25 basis point rate cut, down from ~80% about a month ago. Market expectations are still pricing in five rate cuts this year – still more than the three rate cuts the Fed penciled in last December and the three to four rate cuts our economist expects. But, given that Chairman Jerome Powell has professed that the Fed could cut rates before inflation decelerated to 2.0% and core PCE inflation is already running below the Fed’s 2.0% target on a 3- and 6-month annualized basis, the market is wondering what the Fed is waiting for. Hence, the ongoing tug-of-war. Perhaps the BLS revisions to the inflation data on February 9 will give the Fed the confirmation it needs that this disinflationary trend is not an illusion that will be revised away. The Treasury Department’s quarterly refunding announcement could be another pivotal event next week. While auction sizes are likely to increase again, demand for Treasurys has improved as markets prepare for the Fed’s upcoming easing cycle. The issuance composition – bills versus longer-dated bonds – will be closely watched.
- Important week of economic data | The ongoing strength in the labor market and consumer spending have led consensus expectations to shift away from a recession to a soft landing. We remain in the camp that a recession will take place (although it will be the mildest in history) as our expectation of a softening labor market should lead to weakness in consumer spending. Next week is a critical week of economic data points – particularly for the labor market. What are we watching? First, job openings (which have fallen 27% from the peak in early 2022) will be released Tuesday. We expect job openings to continue to trend lower to the lowest level in three years. Second, the most important release of the week will be the January jobs report on Friday, which should show that the pace of job gains slowed to 150k. If our forecast is correct, it would bring the six-month moving average of job gains to nearly the lowest level (180k) since September 2020. Lastly, ISM Manufacturing on Thursday should show that manufacturing remained in contraction territory for the 14th consecutive month – the longest negative streak since 2002. Ultimately, these data releases should reflect that economic activity is slowing as we move through the early stages of 2024. We expect this weakening trend to continue, potentially tipping the economy into a mild recession beginning in 2Q.
