As we venture into this week’s financial landscape, a critical highlight is the Federal Reserve’s recent dovish pivot, a move that aligns with our anticipations from their December meeting. This pivot is not just a subtle shift in stance but a significant turn in the Fed’s approach towards monetary policy.
The data flow since the Fed’s last meeting in November has been overwhelmingly positive, bolstering the Fed’s confidence in a ‘soft landing’ for the economy. This term refers to a scenario where the economy slows down just enough to curb inflation without triggering a recession. The recent data suggests that inflation is on a downward trajectory, a relief to many who’ve been closely monitoring economic trends.
Federal Reserve Chair Jerome Powell’s statement that the Fed is “aware of the risk that we would hang on too long (at a high policy rate)” is particularly telling. It indicates a concern that maintaining high rates for too long might be more detrimental than having rates that are not restrictive enough. This acknowledgment points towards a more balanced reaction function from the Fed, suggesting a shift away from aggressive rate hikes.
The Fed’s updated statement, projections, and press conference all echoed this change. They noted the slowdown in economic activity from its robust pace in the third quarter, alongside moderating job gains and easing inflationary pressures. This shift in the Fed’s stance is not just a reaction to current economic conditions but also a strategic move to steer the economy towards sustained growth and stability.
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As we close out our weekly reports for the year, with the next one scheduled for the week ending January 5th, 2024, I’d like to extend a special note for the upcoming holiday season. For those of you planning to spend time with family and friends, enjoy your holidays, and I look forward to reconnecting in the new year with more insights and updates.
Now, let’s transition to the specific economic events we can anticipate this week:
The Hot Zones this Week
Monday, December 18:
- NAHB Housing Market Index (December): The forecast anticipates an increase in the index from 34 to 38. This rise suggests an improvement in homebuilder sentiment, albeit with ongoing concerns about high mortgage rates and their impact on the housing market.
Tuesday, December 19:
- Housing Starts (November): The forecast is 1370k. This figure will shed light on new residential construction activities.
- Building Permits (November): The forecast is 1480k. Building permits are a leading indicator of future construction activity and provide insights into housing market trends.
Wednesday, December 20:
- Existing Home Sales (November): While a specific forecast isn’t provided, this indicator is crucial for understanding the dynamics of the housing market.
- Conference Board Consumer Confidence: This measure is significant for gauging consumer sentiment and potential future spending.
Thursday, December 21:
- Initial Jobless Claims: This weekly indicator will offer insights into the labor market’s health.
- Third Estimate of GDP for the 3rd Quarter: An essential indicator of overall economic growth.
- Philadelphia Fed Business Outlook: Provides insights into business conditions and economic expectations in the Philadelphia Federal Reserve region.
Friday, December 22:
- Personal Income and Outlays (November): These figures are key indicators of consumer spending and saving behavior.
- Durable Goods Orders (November): This data reflects the new orders placed with manufacturers for durable goods, indicating the state of industrial activity.
- New Home Sales (November): An important measure of housing market strength.
- University of Michigan Sentiment: A widely watched indicator of consumer sentiment.
Macro Market
Growth
I continue to expect a soft landing for the US economy, where growth falls below trend in 2024 but remains positive. I have marked down the growth forecast for the first quarter of 2024 from 1.0% to 0.5%, responding to the increase in long-end rates. As a result, my growth forecast falls by a tenth from the previous estimate to 0.6% in 2024 on a 4Q/4Q basis, and I anticipate a recovery to 1.7% in 2025.
Inflation
I now foresee PCE inflation falling to 2.0% year-over-year in the third quarter of 2025. Core PCE is likely to fall below 3% year-over-year by the first quarter of 2024. However, the journey to 2% may be slower due to persistently high core services ex-housing inflation. I expect core PCE to decrease to a slightly above-target 2.2% year-over-year by the third quarter of 2025.
Federal Reserve
The Federal Reserve held steady in their December meeting as anticipated. I do not foresee any further hikes from the Fed. My expectation is for the first rate cut in June 2024, though March could be a close call. This would likely be followed by quarterly 25 basis point reductions in the policy rate, totaling 75 basis points of rate cuts in 2024 and 100 basis points in 2025.
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Week’s Numbers
Review Last week’s numbers here.
Earnings
Source I/B/E/S data from Refinitiv
Aggregate Estimates and Revisions
- 23Q3 Y/Y earnings are expected to be 7.2%. Excluding the energy sector, the Y/Y earnings estimate is 12.7%.
- Of the 499 companies in the S&P 500 that have reported earnings to date for 23Q3, 81.8% have reported earnings above analyst estimates. This compares to a long-term average of 66.5% and prior four quarter average of 73.6%.
- During the week of December 18, nine S&P 500 companies are expected to report quarterly earnings.
Global Spotlight
Japan-ASEAN Summit
Tokyo Hosts ASEAN Leaders In a significant move to bolster economic and security cooperation, Japan is hosting the ASEAN leaders for a summit in Tokyo from December 16-18. This meeting marks the 50th anniversary of Japan-ASEAN relations. Amid China’s growing influence in Southeast Asia, Japan’s once-dominant position has seen some erosion. The summit is expected to reveal a “new vision” for Japan-ASEAN cooperation, with Japan likely extending increased security aid through its Official Security Assistance program. However, ASEAN’s balancing act between Japan and China limits the potential depth of this collaboration. Japan’s individual meetings with nine ASEAN members, excluding Myanmar, could lead to more robust bilateral agreements, particularly with nations like the Philippines and Vietnam, who face maritime disputes with China.
Chile’s Constitutional Referendum
Chile Decides on New Constitution Chile is set to hold a mandatory referendum on December 17 to decide on adopting a new constitution, less than two years after a similar vote. The proposed constitution, drafted by a Constitutional Council with a right-wing majority, closely mirrors the country’s existing military dictatorship-era constitution. Recent polls show a lean towards rejecting the new constitution, though opposition has slightly decreased. If passed, the new constitution is expected to trigger protests in major cities, given its similarity to the current constitution. A rejection would likely stall any future constitutional rewrites, as indicated by President Gabriel Boric.
Iraq’s Provincial Elections
Iraq Faces Political Stalemate On December 18, Iraq will conduct provincial elections amidst a deep parliamentary deadlock. These elections, largely symbolic nationally, have nonetheless stalled the appointment of a new parliamentary speaker. The elections have also heightened tensions within Shiite political groups, with the Sadrist movement calling for a boycott. The backdrop of the Israel-Hamas conflict in Gaza adds complexity, as Iraqi militias retaliate against U.S. forces for their support of Israel, complicating the Shiite establishment’s response to both domestic and regional challenges.
Chad’s Referendum
Chad Votes on New Constitution Chad is preparing for a December 17 referendum on a new constitution that could enable Interim President Mahamat Deby to run for president in 2024. The proposed constitution aims to transform Chad into a unitary, non-federal state with increased decentralization. Despite recent reconciliations between the Deby administration and opposition leaders, civil society and religious organizations, as well as a northern rebel movement, have opposed the referendum. The referendum’s likely passage, amid concerns of government interference, raises the potential for future violence and political instability.
Congo’s General Elections
Congo’s Election Amidst Conflict The Democratic Republic of the Congo is gearing up for general elections on December 20. President Felix Tshisekedi seeks re-election against several opposition candidates. The election lead-up has been marred by violence and clashes between opposition and government supporters. The ongoing conflict in the eastern provinces poses a significant threat to voter turnout, potentially benefiting Tshisekedi, who faces lesser popularity in the region. While Tshisekedi is favored to win, the aftermath is expected to be tumultuous, with possible accusations of electoral fraud and election-related violence likely delaying a definitive result.
Stratfor.com
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