This Week's State Of The Economy - What Is Ahead? - 23 February 2024

By: Taro Chellaram /Wells Fargo Economics & Financial Report/Feb 27, 2024

This Week's State Of The Economy - What Is Ahead? - 23 February 2024

The economic calendar was quiet the past few days, so market participants continued to digest last week's slew of data. Retail sales, manufacturing production and residential construction all came in weaker than expected in January, while consumer and producer price inflation were stronger than expected. The combination of slowing output amid persistently elevated price growth puts the Federal Open Market Committee (FOMC) in a tough position in terms of fine-tuning monetary policy, but some of the softness in activity can be chalked up to seasonality. We suspect the Committee will stand pat at its next meeting in March to allow for more data to come through.

The economic reports released this week were mixed, but they largely leave the narrative unchanged, in our view. The Leading Economic Index (LEI) came in slightly under expectations, falling 0.4% in January. Even though consumer expectations and the new orders component of the ISM manufacturing index jumped at the beginning of the year, sentiment is rebounding from low levels after spending much of 2023 in the doldrums. Average weekly hours in the manufacturing sector nosedived in January and the yield curve remained deeply inverted. As these components are heavily weighted in the index, the monthly outturn was negative. The LEI now stands just two points above its April 2020 low (chart), which underscores the magnitude of its out-of-sync recession signal.

While the LEI continues to gesture toward tough waters ahead, the home resale market finally caught a tailwind. Existing home sales rose 3.1% in January to a 4.0 million-unit annual sales pace. The increase was widely expected as pending home sales and mortgage purchase applications perked up in December amid declining mortgage rates. The sales rebound may prove to be short-lived, however. The average 30-year fixed mortgage rate crept up 30 bps over the past few weeks to 6.9% (chart), as recent inflation data have added credence to a “higher for longer” interest rate environment.

Underpinning the move higher in mortgage rates, the minutes of the FOMC's January meeting were mildly hawkish. The Committee held its benchmark interest rate steady last month and signaled that it would not lower rates “until it has gained greater confidence that inflation is moving sustainably toward 2 percent.” In support of that stance, the minutes revealed that “most participants noted the risks of moving too quickly to ease the stance of policy and emphasized the importance of carefully assessing incoming data in judging whether inflation is moving down sustainably to 2 percent.”

While we look for the core PCE deflator, the Fed's preferred measure of inflation, to have edged down in January on a year-ago basis—see U.S. Outlook for more detail—the upside surprise in the CPI is not a confidence booster in the campaign to get inflation back down to 2% on a sustainable basis. We currently forecast the first rate cut to take place in May, but the timing of that cut is at risk of slipping further into the summer.

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