Not too hot, not too cold: Rate cuts shaping up for mid-2024

Employment release is cooler under the surface

The U.S. added 275,000 jobs in February, beating expectations once again as health care, government, and food and drink sectors all saw strong gains. While this is distinctly above both market estimates and the 12-month average of +200,000 and +230,000, respectively, jobs figures from December and January were both revised down for a total impact of -167,000 to negate some of February’s positive impact.

The domestic unemployment rate saw growth for the first time in four months, rising to 3.90% (its highest in two years). This was accompanied by growth in the jobless level, though overall labor force participation stayed steady at 62.50%. Alongside slowing wage growth, this release helped assuage economists’ concerns that the labor market will stay too hot for the Federal Open Market Committee (FOMC) to begin cutting interest rates in the coming months. Treasury yields initially dropped in reaction to the publication, but had recovered almost in full by mid-day Friday, with long-term treasuries rebounding faster than shorter-term. That said, yields ended the week at their lowest thus far in March.

Powell: “Not far” from being able to cut rates

In his testimonies before the House Financial Services Committee and the Senate Banking Committee on Wednesday and Thursday of last week, Chair Jerome Powell did not break his usual trend of using intentionally broad language when discussing the path forward for the FOMC. That said, his comments are largely being interpreted as supportive of rate cuts later this year, which is also in line with the dot plot released in the last set of economic projections released by the Fed. Chair Powell noted that the economy is in a “healthy place,” and that the FOMC is “not far” from having the confidence that inflation is moving back towards the mandate goal of 2.00%. Once that last step is reached (though unclear exactly how big Powell deems that step to be), it would then “be appropriate to begin to dial back the level of restriction” so that the FOMC does not create a recessionary environment. Chair Powell’s remarks were generally welcomed by markets, which have already been pricing in three to four rate cuts in 2024.

Chair Powell’s testimony also addressed the banking sector. While asserting his continued confidence in the power of the FOMC to regulate any potential fallout in the sector, he did highlight risks among smaller and medium-sized banks due to continued declines in the commercial real estate sector. Recognizing the connections between the two sectors, he made clear that the FOMC and regulators are working to be proactive with any banks they deem to be at risk, deeming the current state of things to be “manageable.” Powell did receive a bit of pushback from Committee members in his testimony on bank regulation, as Senator Elizabeth Warren noted news of Powell helping rework and weaken proposed regulations on capital requirements for banks. Chair Powell stayed firm that he has remained true to his word to hold banks accountable but was not able to avoid criticism.

OPEC+ extends cuts through June

Last Sunday, OPEC and its allies (OPEC+) agreed to extend production cuts on crude oil of 2.20 million barrels per day through June of this year. Markets had largely been anticipating this update, having priced it in prior to the announcement according to some economists. Additionally, the combined oil production in February from OPEC+ members was above the set quota by around 175,000 barrels per day according to estimates from Platts. Elsewhere, news of lofty economic targets out of China also shook-up oil markets a bit, putting downward pressure on prices as markets fear slower-than-hoped-for growth. Both Brent and WTI crude prices dropped over the course of the week.

The week ahead

After an influx of recent “Fed-speak,” the FOMC now enters their media black-out period in advance of next week’s meeting. Tomorrow brings a fresh CPI print from February, with domestic retail sales data and PPI updates coming on Thursday.