Weekly Economic Review: March 4, 2024
Last week, all eyes were on the Personal Consumption Expenditures (PCE) inflation index for January. Besides the inflation report, other meaningful economic data was released, and we saw the S&P 500 and NASDAQ hit all-time highs last Friday. Many of us also read Warren Buffett’s annual letter to Berkshire Hathaway shareholders, with its timeless investment wisdom. Let’s review some of the important economic data released last week.
PCE Index. On Thursday, the PCE index for January came in largely as expected. The PCE index is the Fed’s preferred inflation measurement, so it represents an important driver of Fed policy decisions. Year-over-year, the January PCE index increased by 2.4%, which was as expected, and down from 2.6% in the prior month. Excluding food and energy, the core PCE rose 0.4% in January, and while this was as expected, it represented the largest monthly increase in a year. On an annual basis, the core PCE increased 2.8%, in line with expectations, and a slight decrease from 2.9% from prior month. Overall, the PCE figures indicate that inflationary pressures are not moderating significantly, which reinforces the Fed’s reluctance to cut rates at the present time.
Gross Domestic Product. On Wednesday, fourth quarter 2023 GDP was revised slightly lower, from 3.3% to 3.2% on an annualized basis in the second-round Q4 report. This is an indication of a strong economy and resilient consumers. But the day before, the Conference Board reported its surprise finding that February consumer confidence fell. While consumers still remain relatively optimistic, their confidence is ebbing due to persistent inflation and future uncertainty. The market pays close attention to this data, as changes in consumer confidence can impact consumer spending, which accounts for more than 70% of GDP.
Housing. On Monday, new home sales rose to a three-month high month-over-month, but this number was lower than expected. On an annual basis, sales rose 1.9%, down from 2.4% in the prior month, and the weakest annual pace since March 2023. The median cost of a newly constructed home rose 1.8% from the prior month, to $421,000. Year-over-year, however, new home prices declined 2.6% in January following a 13.8% drop in December.
On the same day, the FHFA House Price Index for December rose, but came in lower than expected. Likewise, the S&P Case-Shiller 20 City Home Price Index rose, but came in lower than expected and below the level of the prior month. The S&P CoreLogic Case-Shiller National Home Price Index rose modestly (by 0.19%) in December but also was lower than the prior month.
The housing price data show that the current high mortgage rates have choked off much housing demand, and thus reduced inflationary pressures in the housing sector. According to real estate brokerage Redfin, new home listings rose 13% year-over-year during the four weeks ending February 25, the biggest increase in nearly three years, but high mortgage costs pushed pending sales down 8%, the biggest decline in five months. Whether this trend will spread to the broader economy remains to be seen.
Fed Pronouncements. On Friday, Fed Governor Waller supported the Fed’s shift in its balance sheet holdings toward a larger share of shorter-term Treasuries. Dallas Fed President Lorie Logan expressed her view that it will likely be appropriate for the Fed to start slowing the pace at which it reduces its balance sheet. Both of these statements indicate a likelihood of near-term Fed bond purchases (or at least a reduction in bond sales), particularly in shorter-term obligations. Increased purchases/reduced sales translate into higher bond prices, and higher bond prices equate to lower interest rates. These comments caused the two-year note’s yield to decline more than 10 basis points. Longer-dated Treasury yields also fell, but less than the two-year. When compared to Friday of last week, the two-year Treasury yield declined 13 basis points to 4.54%, and the ten-year Treasury yield decreased 7 basis points to 4.19%, reducing the current yield curve inversion (in which short-term rates are higher than long-term rates).
Looking ahead. This week, Federal Reserve Chair Jerome Powell will deliver his semiannual monetary policy testimony to the House on Wednesday and the Senate on Thursday. Because of the continuing hot inflation data, he is expected to maintain a hawkish position despite some softening of economic conditions, indicating that the Fed will take a very patient approach to lowering rates. The Federal Reserve next meets on March 19-20, and is expected to maintain the current fed funds rate. The most important economic data this week will be the monthly jobs report on Friday. The market expects businesses to add 200,000 new jobs in February after blowout job growth of 353,000 in January that was the largest in a year. Also, the market expects the unemployment rate to hold at 3.7%, and hourly earnings growth to slow down.
On a concluding note, last week Berkshire Hathaway reached a market capitalization of almost $1 trillion, making it the first non-technology US company to reach this exalted level. In his annual letter to shareholders, Berkshire Hathaway Chair Warren Buffett started with a tribute to his long-time business partner and the company’s late vice chairman Charlie Munger, who died in November, just 33 days before his 100th birthday. Buffett reminded readers of some well-known advice from Munger — buying wonderful companies at fair prices is better than buying fair companies at wonderful prices. Buffett credited Munger with changing his attitude toward investing and thus contributing to the company’s incredible success. He also shared another investment lesson – when you find a truly wonderful business, patience pays.
Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California
Thomas McCullough
EVP of Commercial Bank of California
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