Wentz Weekly Insights
Fed Maintains View of Three Rate Cuts in 2024, Markets Move Higher

It was another week that was dominated by mega cap stocks and those benefiting from the wave of investment in artificial intelligence. The S&P 500 saw its best weekly gain of the year, rising 2.29% while the tech-heavy NASDAQ performed even better with a 2.85% increase. In fact, last week saw the S&P 500, NASDAQ, and Dow all close at new record highs for the first time since November 2021. Meanwhile, the small cap Russell 2000 index gained 1.60% but still underperformed and still 19% off its record high.
Nvidia’s developer conference brought on no surprises – with Nvidia unveiling its new Blackwell graphic processing unit (GPU) architecture that powers accelerated computing like artificial intelligence and generative learning. The highlights were pretty technical, with the new chip being much more powerful than the current high end chip in the market, but the market’s takeaway was positive. Nvidia CEO Jensen Huang said the new Blackwell architecture took “something like $10 billion” to develop and one of its graphic cards will sell for about $30,000 to $40,000 each.
Meanwhile, stocks got another boost the second half of the week after the Fed’s meeting concluded Wednesday afternoon and sent the markets to new highs. Markets evidently took the Fed meeting as more dovish (more accommodative, less restrictive), apparent by stocks move higher and bond yields move lower. There was a concern for investors that Fed officials would cut back their outlook on rate cuts after January and February inflation data came in hotter than expected. Fed Chairman Powell said the Fed’s outlook has not changed much since the last meeting in February despite this data. The thinking was higher inflation would mean the Fed would have more work to do to bring inflation down, which would equal higher interest rates for longer.
The Summary of Economic Projections (SEP) showed that the median projection on rates was 4.6% by the end of 2024 (compared to 5.3% now), unchanged from its projections made in December, suggesting three rate cuts this year (projections are updated about once every three months). Some had worried this would be upped to 4.9% to reflect just two rate cuts, meaning policy would be more restrictive for longer. Even the most dovish policymakers, who previously saw six rate cuts this year, dialed that back to four cuts. Of the 19 policymakers to provide projections, two saw no rate cuts this year.
In addition, officials’ projections on economic growth and inflation were increased for 2024 while the expectation on unemployment declined. The fact the Fed was still projecting three rate cuts this year, and didn’t cut that to one or two despite the higher inflation data and better growth projections, was enough for the markets to move higher.
However, there was still a hawkish takeaway from the Fed meeting. While rate projections were unchanged for 2024, the expectation for 2025 and beyond show less rate cuts than previously thought. For 2025, officials see three additional rate cuts, down from four. In the longer run, there is an increasing belief that the neutral rate, a rate that neither restricts or supports economic growth, is higher than previously thought. This was increased to 2.6%, up 25 bps from the prior estimate.
The chart below is a snapshot from the FOMC material last week, showing how policymakers’ projections compared to its prior projections in its December meeting.
Speaking on the recent inflation data, Chairman Powell reiterated it is still too early to declare victory on its inflation goal (targeting annual inflation of 2%). Powell said the two months of inflation have not changed the story that inflation is “moving down gradually on a sometimes bumpy road toward 2%,” referring to these two months of data as “bumps” in the road that he has talked about in prior meetings. He added that the Fed does not know for sure if this is just one of those bumps in the road or something more, but time will tell, and the Fed will not look at two months and overreact.
Powell also had comments on the balance sheet runoff plan (the Fed reducing its balance sheet, i.e. quantitative tightening), saying it will start to slow the pace of tightening “fairly soon” and the goal is to hold only Treasuries over the long term (as opposed to a mix of Treasuries and mortgage backed securities).
For much of the past two years, there has been the fear the Fed’s quick tightening of monetary policy, through higher interest rates and quantitative tightening (reducing the money supply), would slam the breaks on the economy and push it into a recession. However, over the past several months there is an increasing belief the Fed can orchestrate a “soft landing” – where it can tighten policy and bring inflation down without seeing a spike in unemployment and decline in economic growth.
The Fed appears on track, but is still weighing keeping policy tight to prevent inflation from reigniting and loosening policy to prevent any economic weakness. One of the more common causes of a recession is policy error, where central banks raise rates too much. Only time will tell, but for now the economy is handling higher rates.
Week in Review:
It was another week that saw mega cap and AI related stocks drive the indexes higher, with the S&P 500 having its best week of the year and the four major US indexes finishing as follows: NASDAQ +2.85%, S&P 500 +2.29%, Dow +1.97%, and Russell 2000 +1.60%. With the Fed not turning more hawkish as the markets had feared, Treasuries moved higher with yields lower – the 2-year yield fell 14 basis points to 4.60% while the 10-year yield fell 12 bps to 4.20%. Bitcoin pulled back with a 8% decline, although still up substantially this year. Gold briefly crossed 2,200 per ounce for the first time ever, but ending the week with a slight decline, while the dollar index rose 0.8%. Commodities continued their run higher with oil up 0.2% for the week as Ukraine targeted Russian refineries.

Recent Economic Data

  • Index of Leading Economic Indicators: For the first time since February 2022, the index of leading economic indicators turned positive with a 0.1% monthly increase for March. The index is a composite of ten forward looking economic releases including data such as weekly jobless claims and building permits for homes. Its purpose has been to predict economic conditions several months forward.
  • Housing Market Index: The housing market index, an index of homebuilder sentiment, rose 3 points to 51 for March, the fourth consecutive monthly gain, the highest level since July and the first time above 50 (the breakeven level – anything over that reflects positive sentiment) since then. The present situation index rose 4 points to 56, sales expectations over the next six months rose 2 points to 62, while traffic of prospective buyers rose 2 points but still at a very depressed level of 34.
  • Housing Starts: The number of housing starts in February was at an annualized rate of 1.521 million, a large jump of 10.7% compared to January’s pace, and 6% above the pace from February 2023. The increase was driven by single family starts. The number of permits for new home builds was at an annualized rate of 1.518 million, about 2% above January and February a year ago. For comparison purposes, the number of starts trended around 1.350 million pre-pandemic and peaked at 1.800 million after the pandemic in 2022. Also of note, the number of new homes authorized to be built, but not yet started has steadily increased over the past year, up to 301k which is a 11.5% increase from a year ago level of 270k.
  • Existing Home Sales: The number of existing homes sold in February unexpectedly rose 9.5%, the largest monthly increase in over a year, to a seasonally adjusted annualized pace of 4.380 million homes. This is an improvement of 3.3% from February 2023. Sales of existing homes are measured by closings so this reflects contracts signed in December and into January when rates were near the lowest level of the past 8 months (now up half a percent since). Inventories improved somewhat, up 5.9% in the month and now up 10% form a year ago to 1.07 million existing homes, equivalent to 2.9 months’ supply at the current sales pace. There was a new all time high in prices too, the median price rose 5.7% from a year ago to $384,500. Realtors are starting to see buyers are getting used to a “new normal”.
  • Mortgage Rates: The average prime 30-year mortgage rate climbed 13 basis points last week to 6.87% and up 45 bps from a year ago, according to the Freddie Mac Mortgage survey. The peak in the 30-year rate was 7.79% back in October.
  • Jobless Claims: The number of unemployment claims the week ended March 16 was 210,000, relatively unchanged from the prior week with the four-week average up slightly to 212,000. The number of continuing claims was 1.807 million, up slightly, with the four-week average at 1.802 million, also up only slightly.
  • Philly Fed Manufacturing Index: The Philly Fed Manufacturing survey index was 3.2 for March, roughly the same as February, better than a negative read that was expected, and reflecting much better conditions than what the Empire State Manufacturing Index suggested last week. The report showed new orders turned positive, employment remained negative, but optimism with future activity index improving, while only 24% of firms reporting increases in general activity, 21% reporting decreases, and 52% reporting no change.

Company News

  • Apple Licensing Google’s AI?: Shares of Google parent company Alphabet were higher last week after a Bloomberg report said Apple is in discussions with Google to build Google’s artificial intelligence engine, Gemini, into Apple’s iPhones. The agreement would let Apple license Google’s generative AI models to power its new AI related features coming to the iPhone this year. The report added Apple has also held discussions with OpenAI, who has been partnered with Microsoft. The deal would provide Google’s Gemini more exposure but may also be a sign Apple is not as far with its AI efforts.
  • JoAnn Fabrics Bankruptcy: The Hudson, Ohio based fabric and craft retailer JoAnn Inc filed for Chapter 11 bankruptcy last week. It said it expects to emerge from bankruptcy as early as next month and become privately owned by “certain lenders and industry parties.” The filing said it had more than $2.4 billion in debts and about $2.26 billion in total assets.
  • Temu’s Effect: The online shopping platform Temu, owned by Chinese company Pindoudou, said it is aiming to dial back its reliance on the US consumer. It is estimated about 60% of its gross merchandise sales come from the US and it is making it a goal of reducing that to around 30%. As a result, shares of Meta and Alphabet saw weakness as Temu has been one of their largest advertisers lately.
  • Grants to Intel: The White House officially announced it has awarded Intel $8.5 billion in grants and $11 billion of potential loans through the CHIPS Act to advance its semiconductor projects in the US.
  • Boeing’s M&A: A Reuters report said Boeing is looking at ways to sell Spirit AeroSystems businesses that supply to Airbus in the event Boeing purchases Spirit, which was reported it was looking into doing so several weeks ago. Spirit’s Airbus business generates about 20% of its revenue and the sources say Boeing does not want to own that part of the Spirit business. It is also worried European regulators would have issues with Boeing supplying its main competitor. In addition, Bloomberg reported Boeing is looking at possibly selling at least two of its smaller businesses in the defense, space, and security unit to strengthen its balance sheet.
  • Boeing’s Updated Guidance: Separately, Boeing said its free cash flow will be much less than expected in the first quarter (-$4.5 to $-4.0 billion versus -$1.5 billion consensus) due to the less aircraft deliveries and higher working capital after the emergency door blew out on an Alaskan flight in January.
  • DoJ Lawsuit Against Apple’ Monopoly: A report by Bloomberg says the US Justice Department is getting ready to file a lawsuit against Apple as soon as today, accusing it of violating antitrust laws by preventing rivals from accessing iPhone features including hardware and software, its first case accusing Apple of illegally maintaining its dominant position. Regulators have recently attempted to crack down more on big tech, with an ongoing DOJ lawsuit against Alphabet (Google) and Federal Trade Commission lawsuits against Meta and Amazon.

Other News

  • Saudi Arabia’s AI Fund: Saudi Arabia is planning to create a $40 billion fund to invest in artificial intelligence technologies and would make it the world’s largest investor in AI, according to the New York Times. It said the Saudis are serious about investing in the technology as it sees it reshaping industries and has been discussing potential partnerships with several large US private venture capital firms. The Saudis would pursue the investment by drawing from its sovereign wealth fund, which currently has assets worth around $900 billion.
  • Congress Comes to An Agreement: Roughly half a year into the US government’s fiscal year, Congress finally reached a deal on a spending package through September that avoids a government shutdown. This permanent budget plan comes after months of negotiations and dozens of failed attempts since last year with several stop gap bills to keep the government temporarily funded. The $1.2 trillion package includes six appropriation bills that funds a variety of government agencies.
  • Central Bank Headlines:
  • In its latest policy meeting last week, the Bank of Japan raised its benchmark interest rate by 0.1%, its first rate increase in 17 years, ending its negative interest rate policy and the last major central banks in the world to raise rates. In addition, it said it would end its yield curve control policy – A policy that started in 2016 where it would buy unlimited amounts of Japanese government bonds to keep its yield to a certain percentage, it was initially at 0%, but they allowed it to float as high as 1% recently, now ending the cap. It will also end its program of buying risk assets such as ETFs, REITs and phase out its purchases of corporate bonds. These decisions were expected with media press releases in the days leading up to the decision.
  • The Bank of England left rates unchanged and is basically in the same spot as the Fed – indicating it will cut rates soon. It saw an 8-1 vote with one official voting to cut rates, a difference from a 6-3 vote in its prior meeting where two voted to raise rates again.
  • Meanwhile, the Swiss National Bank surprisingly cut rates by 25 basis points to 1.5%, becoming the first central bank in a developed economy to cut rates this cycle.

Did You Know…?

Higher Tax Refunds

The Internal Revenue Service reported in its March 15 update that it has received over 71 million tax returns for the 2023 tax year and have issued nearly 50 million refunds so far. Of the nearly 50 million refunds, taxpayers have been returned a collective $152.8 billion, averaging a refund of about $3,100 per taxpayer. This compares to the average refund of $2,933 received in 2023, measured over the same period, equal to a 6.0% increase from last year. However, over the same period, less people are getting a refund. While the number of taxpayers filing so far is relatively unchanged compared to the same period in 2023, the number receiving a refund is about 9% lower compared to 2023, which could be contributed to higher incomes and higher capital gains.

WFG News

The Week Ahead

It will be a holiday shortened week with markets closed on Friday in observation of Good Friday. Investors’ main focus will be on the momentum with tech/AI related stocks as well as the next inflation read on Friday in the PCE price index, the Fed’s preferred reading. The index is expected to have risen 0.4% in February with a 2.8% annual increase in core prices. Other economic data releases include new home sales on Monday, durable goods orders, consumer confidence, and the January Case-Shiller home price index on Tuesday, jobless claims, pending home sales, the consumer sentiment index on Thursday, and personal income and outlays on Friday that includes consumer spending, personal income figures, and the price index. On the Fed side, there will be a number of Fed officials making public appearances this week where markets will look for any follow up comments after last week’s Fed meeting, including a moderated discussion which Chairman Powell will attend Friday morning. The earnings calendar is very light, but still a couple notable reports from McCormick, Carnival, and Walgreens. The corporate calendar also includes several investor events that may bring company updates.