Lindsay James, investment strategist at Quilter Investors reflects on some of the latest data and looks ahead to decisions from the Fed later today commenting:
“This morning’s Nationwide House Price Index data has brought a little more optimism, showing UK house prices rose 0.7% month on month in January, and are now down by 0.2% compared with a year ago. Of course, with CPI standing at 4% in the year to December the real impact is more noticeable, however, the direction of travel is at least improving. The survey cites improving mortgage rates as a factor in this, but also notes that mortgage rates of 3% would be needed for this measure of affordability to return to its long run average. By the end of 2024, 60% of mortgages will have rolled off 2022 rates onto new mortgages, typically at significantly higher rates, acting as a continuous economic headwind until rates can fall more significantly.
“US job openings came in well ahead of estimates yesterday afternoon but were largely unchanged over the month, demonstrating the labour market remains an important driver of economic growth. With consumer confidence also coming in slightly ahead of estimates and hitting a 2-year high, it’s clear that falling inflationary forces are starting to make respondents feel a little more optimistic about the direction of the economy.
“Whether the Federal Reserve agrees will be made clear tonight, as its latest policy setting meeting concludes. The December meeting saw the ‘Santa rally’ shift into a higher gear, as it signalled three rate cuts in the year ahead. With the economy showing largely strong data points since then, albeit with the preferred measure of inflation very much on target, the market has cut the likelihood of a first rate cut in March from 73% at the end of 2023 down to 39% now, but this meeting will almost certainly trigger further calibration around the extent and timing of future cuts.”
According to Robert Alster, CIO at Close Brothers Asset Management, the Fed is not likely to be in a hurry as he shares his thoughts ahead of the latest rate announcement due this evening:
“With the US having the best performance of any major advanced economy in 2023, US inflation firming to 3.4% in December and Friday’s labour data likely to show only gradual slowing, it’s not surprising that the Fed is expected to hold firm and maintain interest rates at the FOMC meeting later today.
“That said, the Fed has acknowledged that the next question is the timing of rate cuts and, while the US economy has performed well so far, we are expecting a weaker first quarter. We expect this to be the catalyst for policy loosening, with markets currently pricing in the first rate cut in May and five 25bps cuts this year. Barring a significant downside surprise, five cuts seems optimistic, given current economic conditions, and rate cuts could be delayed. With the option to increase the scale of cuts if necessary, the Fed has no reason to rush.”
