February 29 - Today's PCE reading coming in line with expectations brought initial optimism to Wall Street, as stocks rose aggressively to start the morning, though they've since traded both sides of unchanged and remain mixed to slightly higher at mid-day as the full picture is digested more clearly, as outlined in more depth below. The VIX is softening through the morning, trading back below the 13.5 level. The dollar is slightly in the green again at the time of writing, trading above 103.9 after pushing lower to 103.6 earlier in the session. Treasuries are weaker on the day, with 10-year yields trading just above 4.23% and 2-year yields just above 4.62%. Nearby crude oil is up slightly on the day, with April WTI trading around $78.75 at the time of writing, though deferred contracts are in the red as the near-term geopolitical issues provide support but longer-term fundamentals remain somewhat heavy. The ags are mostly higher on the day, save for some weakness in cattle and cotton futures.
While headline PCE inflation fell to its lowest rate since February 2021 at 2.4%, the 0.4% month-on-month uptick in core PCE prices was the sharpest increase seen since January 2023, up considerably from December's downwardly revised 0.1% gain. Additionally, the 0.3% month-on-month gain in headline PCE was a combination of a 0.6% rise in prices for services being offset by a 0.2% decline in prices for goods, keeping present the concern for lingering wage inflation to keep pressure under the cost of services amid a very resilient U.S. labor market. So, while today's news is being taken as positive by Wall Street due to its lack of bearish surprises, it's important to keep in mind this is not a favorable enough reading to meaningfully shift the Fed's current course of action to the dovish side, it's simply not bad enough to turn them more hawkish after recent inflation readings brought back more concerns of a resurgence. At this point, however, the trade will take wins where they can get them. Comments yesterday from Fed members continued to emphasize their caution, with New York Fed President Williams emphasizing that the Fed has the time to monitor data over time to ensure reductions to inflation hold before making the decision to pivot. While the FOMC will get plenty of other data points before their next meeting March 19-20, this will be the last reading of their preferred inflation measure before then. While the market's expectations of a rate cut at the March or even May meeting are now extremely minimal, with the first cut expected in June, there will still be plenty of intrigue regarding the comments and potential for shifting sentiment at their meeting that can shape the market's expectations for the second half of 2024.
Pending home sales in the U.S. fell by more than expected in January, falling 4.9% month-on-month and 8.8% year-on-year, the sharpest drops since August and September, respectively. This was a bit of a surprise given other indicators for the month of January and brings more caution for upcoming February readings. High interest rates and limited existing homes inventory continue to weigh on sentiment, but U.S. home prices have continued to set record highs regardless.
The Kansas City Fed's Manufacturing Index broke into expansion in February for the first time since August after spending five consecutive months in contractionary territory. The rise to a reading of 3 marked a huge jump from the sharp dip to -17 seen in January, though that was likely in large part due to the extreme cold experienced slowing down production. The KC Fed's Composite Index remained in contractionary territory for the sixth consecutive month, however, showing an improvement from January's -9 to a reading of -4 in February, though slightly missing expectations of a rise to -2. Elsewhere, the Chicago Business Barometer (a.k.a. Chicago PMI) disappointed in February, also hanging in contraction as it fell to a reading of 44 versus expectations of a rise to 48. The market will get further clarity on the health of the U.S. manufacturing sector with both S&P and ISM's Manufacturing PMI's due to be released tomorrow morning.
