Fed Gets Great Growth, 2% Inflation In Favorable GDP Release
The US economy expanded far faster than expected during the final three months of 2023, hotly-anticipated data released on Thursday showed.
Growth was 3.3% in Q4, the BEA said, in the first of what'll eventually be three tallies. That was easily ahead of estimates. All of them. The highest guess from nearly six-dozen economists was 2.5%.
Suffice to say the Fed hasn't succeeded in engineering below-trend growth. As long as inflation continues to recede, that's a good thing, although it makes fo
Takes a first cut in March off the table, no?
I don’t think so — not in traders’ minds, anyway. That core PCE print may actually prompt higher implied odds of a March cut. Remember: Rate cuts in 2024 are predicated on falling core inflation, not rising recession odds. In other words, they’re going to cut irrespective of growth outcomes as long as inflation recedes. So, my guess would be that assuming Friday’s PCE prices data is favorable, some of the rate-cut premium that was priced out of the March meeting in recent days will get priced back in. Of course, Powell can upend that entirely next week, but for now, I don’t think this release takes a March cut off the table at all. I think traders will increase bets on a March cut, at least at the margins.
Thanks. Crude is up $5 over the last week, and shipping costs are spiking as the Houthis continue their attacks on ships entering the Red Sea. Will be interesting to see when (and if) turmoil in the region shows up in higher core.
I would assume this brings the R-Star debate back in to mix. Even if the Fed wants to cut because of falling inflation, a GDP number like this makes it very difficult. Maybe the economy needs a higher neutral rate to keep it from overheating? There seems to be an underlying cross current driving these GDP surprises, possibly productivity gains from AI.
If I’m honest I think interest rates are very far down the list of relevant factors for inflation and the macro in general in the 2020s. The Fed doesn’t have any control over this. R-star’s a joke. NAIRU too. The whole thing’s a joke, including the notion that statisticians can calculate aggregates for an economy the size of America’s. These numbers are meaningless, and the idea that rate hikes had anything to do with inflation falling over the last year is obviously laughable. But I have to pretend that all this means something and is worth talking about because otherwise I’d irritate too many people (even as I’d be a delight for the handful who share my general disdain for — well, for everything, really.)
Do you think the fed knows interest rates are optics or are they operating under the assumption that there is a relationship between interest rates and what happens in the chaos miasma that is the “economy”? Either way they should do what Sahm is saying and start cutting to avoid the worst case scenario, or at least the appearance that they caused it. And no, an uptick in inflation is not the worst case scenario.
Please add me to the list of those who share your general distain.
LOL.. I would agree that all the debates around these “magical” numbers are silly, but the level of interest rates does matter. It is very clear that inflation was in fact transitory due to supply constrains but if the Fed had kept rates at zero and continued QE, we would be in a very different place. (at least in my opinion) Since the Fed uses these “magical” numbers to set interest rate policy, they have some meaning even though it’s dumb to believe that anyone can actually calculate them.
Maybe 1 more rate hike will keep the Houthi’s from bombing our container ships in the Red Sea? 🙂
Your cynical sense of humor is one of your best characteristics.
Estimates from all those smart people are still off – either models need tweak or data is not easily modeled- or both! Goldilocks or not – an opaque horizon.
Back in the day – this is two decades ago – Albert Edwards and James Montier used to write for Dresdner Kleinwort Benson on “behavioral finance”. Their pieces were collected in a bound book, which I still have. Looking at it reminds me of all the sellside shops that are no longer – DrKB, Lehman, Salomon, Bear, Prudential, etc. I think I have conference bags from most of those in the basement. Sigh.
Anyway, their writing introduced me to a game that you can play with a group of people. Everyone in the group privately picks a number, from 0 to 100 inclusive, and transmits it to the score-keeper (you). The winner is the person whose number is closest to one-half of the average of all players’ numbers.
You can see how this works. A person who doesn’t understand the rules might pick 50. A person who heard the rules might pick 25. A person who wants to be a step ahead of the herd might pick 12.5. A person who wants to be a step ahead of others who want to be a step ahead might pick 6.25. A person who wants to be three steps ahead might pick 3.125. And so on.
Being behind the herd means losing. Being too far ahead means losing. Players need to guess how many steps ahead the herd (average) will be, and get one step – not more, not less – ahead of that.
Obvious parallel to investing in most professional contexts (with limited rope). Too early or too late means losing. Being too smart or not smart enough means losing. Regardless of whether you’re right.
Edwards and Montier played this game with various groups of people. If I recall (haven’t read the piece in a long time), buyside equity analysts were about 3 steps ahead. Graduate students in psychology were 7.
Yes, there are cracks in the economic data, economic indicators are worrying, lags may be just about to hit. How many steps ahead does one have to be, to be focused on that? How many steps ahead is the current market and its carbon and silicon inhabitants? Do you want to win the game, or be the smartest person in the game?
That suggests you simply park all your funds with a CTA using trend-following models.
Well, H had an article “we’re all CTAs now” or something like that.
Momentum is important but all that in and out trading would be a tax issue.
Good point, JL. Probably best suited for tax-exempt accounts.
What are some good CTA funds or ETFs?
Alas, I’ve lost those connections as people retire and/or die. But with the robots increasingly in chare, I’m wondering it that approach has merit. Until they algo each other out.
I love this game. A few years ago I was reading a text on decision making to spice up my strategy class and I came across a wonderful exercise. The leader pulls out a crisp $20 bill and offers it for auction. The bidders are asked to bid in $1 minimum increments and the highest bidder gets the twenty. Oh, did I forget, the second highest bidder gets nothing but has to pay what they bid anyway. The first twenty I sold went for $75 dollars. I donated all the money I raked in to a student fund. I used to get invitations to be an after-dinner speaker for various professional groups from time to time and I started doing simple quizzes on decision making as my topic. I’d finish by auctioning a twenty. It worked every time. I’d donated all the money gained back to the group. Sometimes its hard to see just what one is getting involved in until it’s too late.