March 29, 2024: The Ripple Effects of Waller’s Hawkish Remarks: Interest Rate Outlook, The Inflection Point of the Global Electric Vehicle Market, and Tesla’s Challenge
Waller’s Hawkish Remarks and Interest Rate Outlook
The New York bond market saw an increase in interest rates starting the morning of March 28th (Eastern Time), influenced by hawkish remarks made the previous night by Christopher Waller, a member of the Federal Reserve (Fed).
Waller emphasized the lack of urgency for rate cuts in his speech titled “There’s Still No Rush,” citing January and February’s Consumer Price Index (CPI) data. His main argument highlighted the need for caution with rate cuts in the short term based on recent disappointing inflation data, suggesting a diminished likelihood of rate cuts within the year. Following his comments, the yield on 2-year Treasury notes rose by about 5 basis points, and the probability of a rate cut in June dropped to 64%.
Powell and Waller’s Diverging Views
Waller, a key influencer within the Fed and a permanent voter on the Federal Open Market Committee (FOMC), has expressed a cautious stance on rate cuts, aligning with Raphael Bostic, president of the Federal Reserve Bank of Atlanta. On the other hand, Jerome Powell, Chair of the Fed, mentioned at an FOMC press conference that while unanimous decisions are preferred, thoughtful dissenting opinions are respected. This suggests Waller might vote against if inflation data deviate from expectations.
Market Outlook and Expectations
Former Fed Vice Chair Richard Clarida stated that while the central banks might begin rate cuts before inflation hits 2%, they would pause the rate cut cycle if inflation remains around 2.5% over the long term. Newedge Wealth warned that if the upcoming PCE data for February exceeds market expectations, the expectation for rate cuts this year could drop to zero.
Inflation Data and the Fed’s Response
The headline PCE is projected to have increased by 2.5% year-over-year and 0.4% month-over-month, with the market focusing on signs of easing service inflation. Jerome Powell is scheduled to speak at a conference at the Federal Reserve Bank of San Francisco following the release of this data.
Despite these considerations, UBS and Goldman Sachs analyze that inflation will decline, setting the stage for the Fed to cut rates this year. UBS deems the current benchmark rate restrictive, predicting an economic slowdown and cooling job market. Goldman Sachs believes the toughest part of the inflation battle is over, expecting inflation expectations to normalize and the job market to rebalance.
Recent Economic Data Analysis: Goldilocks Economic Indicators
Recent economic data suggest a Goldilocks economy, seemingly contradicting Christopher Waller’s outlook. The final GDP growth rate for the last quarter was 3.4% annualized, exceeding the preliminary estimate of 3.2%. Personal consumption expenditures (PCE) increased by 3.3% quarter-over-quarter, higher than the initial estimate of 3.0%, with core PCE prices revised down to 2.0%. Charles Schwab evaluates this data as positive for a soft landing forecast.
Unemployment Rate and Consumer Sentiment Index
Last week’s initial jobless claims fell to 210,000, while continued claims rose to 1,819,000. Evercore ISI estimates that the upcoming March employment report will show 225,000 new jobs.
The March consumer sentiment index from the University of Michigan reached its highest level in over two and a half years at 79.4, with expected inflation decreasing. This suggests the U.S. economy continues to grow robustly, with inflation pressures easing.
Interest Rates and Stock Market Response
Following the release of recent economic data, bond yields reacted accordingly. The 2-year yield moderated its rise, and the 10-year yield briefly declined.
Index Closure Status
Overall, the market continued its wait-and-see approach ahead of the PCE data release and Jerome Powell’s remarks, with limited reaction due to the upcoming Good Friday closure.
Eventually, the Dow Jones Industrial Average closed up by 0.12%, the S&P 500 by 0.11%, while the Nasdaq ended down by 0.12%. Notably, the S&P 500 rose by 3.1% in March, continuing its upward trend for five consecutive months and marking its best performance since 1989 over the last 22 weeks, with 18 weeks of gains.
Despite ongoing doubts about the Fed’s rate cuts, some argue that there’s no need for rate reductions if the economy remains robust and corporate earnings meet expectations. Vanguard also anticipates no rate cuts this year.
Shan Lai Ta, Vanguard’s chief economist, mentioned the market’s reduced expectations from seven to three rate cuts, suggesting that continued economic growth, especially from the supply side, could keep the stock market rally going. He noted that while supply-driven growth usually accompanies disinflation, persistent inflation preventing rate cuts could pose a threat to the market.
Corporate Earnings and Market Forecast
Leslie Thomson, CIO of Spectrum Wealth, expects stock prices to continue rising on the back of strong corporate earnings. Wall Street anticipates a more than 10% increase in S&P 500 companies’ profits this year, with fourth-quarter earnings up by 4.1% from the previous quarter, marking the best quarterly performance since the second quarter of 2022.
Market Trends and Investment Outlook
The market maintains its upward trend despite some concerns about overheating. Recent slight deceleration in the Mag 7 stock rally has been compensated by growth in other stocks, broadening the market’s scope. The equal-weight S&P 500 index has outperformed the market-cap-weighted S&P 500 index in recent rises. However, Goldman Sachs pointed out that the equal-weight S&P 500 index is trading 13% above its model’s fair value, indicating that overvalued states typically result in below-average returns.
Year-End Target Adjustment and Market Outlook
RBC Capital Markets raised its year-end S&P 500 target from 5150 to 5300, suggesting the current strong rally is justified and additional gains are plausible. However, future increases might be more challenging, necessitating adjustments. According to Bespoke Investment, after two consecutive quarters of double-digit gains, the S&P 500 typically experiences a weaker following month but averages a 12.27% increase a year later.
JPMorgan’s Warning
JPMorgan questions the sustainability of the current bull market. Dubravko Lakos-Bujas, the global head of equity strategy at JPMorgan, warned of the risks associated with overly concentrated momentum trades that could lead to sudden downturns. He referenced past instances of sudden crashes, noting that the current level of leveraged investment doesn’t necessarily predict such events.
Upcoming Market Outlook and Key Events
The weekend’s focus should be on market activities starting Sunday evening. With the PCE data release on Saturday and stock and bond markets closed, it’s crucial to monitor the beginning of futures trading on Sunday night for potential increases in volatility and trading volume, which could continue into Monday morning.
Key Economic Data Releases
The most anticipated data in the coming week’s economic schedule is the March employment report, set for release on the 5th. Wall Street forecasts roughly 200,000 new jobs, a decrease from February’s 275,000 but still reflecting a robust employment situation. The unemployment rate is expected to slightly decrease from 3.9% to 3.8%. Additionally, the February JOLTS data and March ADP private employment data are worth noting.
Tesla’s Q1 Vehicle Delivery Announcement
Tesla’s first-quarter vehicle delivery data is scheduled for release on the 2nd. Consensus estimates stand at 460,000 units, though several institutions have revised their expectations downward. For example, Deutsche Bank reduced its forecast to 414,000 units, citing weaker sales in China during March, and RBC and Wedbush have also adjusted their predictions to 446,000 and 425,000 units, respectively. Dan Ives, an analyst at Wedbush, criticized the first quarter as a nightmare for Tesla, citing decreased demand in China and supply issues, including a fire at the Berlin plant.
Electric Vehicle Market Outlook
Goldman Sachs analyzed that the global electric vehicle market is at a turning point. Concerns over falling prices for used electric vehicles, uncertainty around government incentives, and a lack of fast-charging infrastructure are making a bearish scenario for 2024 sales more likely. Against this backdrop, Goldman Sachs clearly favors hybrid vehicles.
