Fed Watch – 12/20/2024

The below transcript is a literal translation of the podcast audio that has been machine generated by Notta.

Hello. Thank you for joining us for this edition of FedWatch. Today is December 20, 2024. It’s been an action-packed week, and let’s see if we can touch upon the highlights anyways. Federal Reserve data came out for the economy showing that U.S. industrial production, which is manufacturing mining utilities are rolled into one, is in recession still. The 12-month moving average is heading lower, and the raw data that came out for November is at its lowest point in 30 months. The slope of this decline, though, continues to be exceptionally mild. By that, I mean we’ve never seen such a mild decline going on. That’s the economy feeling weak. If you’ve been on that weak side, it’s not a whole lot of solace for me to tell you that it’s exceptionally mild. For the last three months, industrial activity is down 0.7 percent year-over-year, which means some companies are appreciably worse than that. Some are seeing single-digit year-over-year increases. How it matters for the Federal Reserve is if they’re looking for ways to justify the need to drop interest rates two more times in 2025, probably 25 bips each time, this gives them some cover for doing that. Retail sales are continuing to grow. The 12/12 is at 3.0. The 3/12 improved to 3.0 and may be shifting back into a phase B. No inspiring numbers, but they suggest that the consumer is holding things together. Again, if the Fed looks at these numbers, they say, well, we’re not in danger of overheating by any means, 3 percent is a solid long-term doable rate. supporting, we may see some more decline. I think we will, by the way, at least once, if not twice, but then that’s going to be all she wrote. And that’s pretty much in line with what we have been saying. If you get our ITR Trends report, you’ll see that housing starts, at least on a rate of change basis, look very bad in the latest data. That’s because last year was exceptionally strong in the same month, so the rates change look awful. But the underlying data is holding up reasonably well. It’s really the multifamily side of things that is dragging down the overall housing starts that continues to look pretty weak. Corporate profits are of concern. They hit a record high for the third quarter. At least we look at non-financial corporate profits. We look at the financial industry separately, so this is for non-financial companies. And that was the record high, which is great, but it was only 5.6% above this time last year. And the 3/12 rate of change continues to ease lower and lower and lower. And at 5.6%, we’re running uncomfortably below the 10-year average, pre-COVID 10-year average of 7.1%, and the pre-COVID 20-year average of 6.0%, which saw its fair share of tough years.

So keep an eye on that. Corporate profitability is one of those signals from our perspective that suggests that we’re on track for the first half of 2025 being sluggish. It’ll be the second half of the year that we’re more likely to see some improvement. And in fact, GDP data came out for the third quarter, also adjusted for inflation. And it was right on our forecast point really was up 0.2% relative to our midpoint of our forecast range. So it was spot on. No surprises in that data. And no surprises that the 3/12 rate of change there is also moving lower. It’s at 2.7% and in phase C. So it is easing downward, and we think it’s gonna continue to ease downward until around mid-2005 when it hits around 2.1% plus or minus a couple of tenths for a percentage point one way or the other. So expect this sluggishness to continue and that gives the Fed leeway to do those two more cuts. I wanna give you some good news. Existing home sales is beginning to perk up and that’s a leading indicator. And we expect it would pick up before other parts of the economy does. In fact, the 3/12 tentatively broke into phase B. The 3/12 is at 1.8% now, it’s a positive number. We haven’t seen that in quite some time. And the 12 month moving total moved up for two consecutive months now. So we have a leading indicator that’s beginning to shift from decline. to rise at the end of 2024, and I think that puts us on track for improving the economy in the second half of 2025, and that’s likely when the Fed’s going to shut down the decline. Now all this is about Fed, but let’s broaden this out and talk about general interest rates. The 10-year government bond yield right now is at 4.52% if I’m allowed to round. That’s up from 4.37% last week when we talked. If I’d cut the Fed funds rate and the bond market pushed the 10-year government bond yield higher today, so far it’s trading in the same range that we saw yesterday, so we don’t see any retreat on the 10-year government bond yield. And if you look at mortgage rates, mortgage rates here at 6.72%, they also don’t care what the Fed’s doing with the Fed funds rate. In fact, that 6.72% is at five basis points from one year ago. No real tendency for decline. Now keep in mind that the Federal Reserve normally takes their clue on what to do with interest rates, in particular the Fed funds rate, from the bond market. And the bond market is being very clear. They’re not seeing things the way the Fed is seeing things. So two more declines, probably from the Fed. At that point, though, that’s as good as it’s going to get. I don’t think we’re going to see the 10-year and mortgage rates really start to rise before the Fed is done with its decline. But don’t look for any hail Mary or any fantastic interest rate. Make you move first half of this year and lock and load. I want to switch for a little bit. One of the things that we do with our financial resiliency program when we forecast companies out into the 2030s depression is we look for interest rate and overall price sensitivity. We have inflation coming back in our view. We have interest rates going a lot higher. And that trend gradually starts post mid 2025. Different companies are going to react different ways to that. And it will impact their multiples. It can impact their revenues. It certainly is going to impact their profitability. That’s all part of the analysis that is possible. Next week is Christmas. So the next time we get back together will be January 3rd, 2025. Yay, we finally made it. And I look forward to seeing you. And on behalf of the entire team, happy holidays and we wish you well.