January 30 – Stock futures are mixed this morning, as traders digest yesterday’s headlines from the Fed, along with this morning’s economic data. The VIX Is trading near 16 this morning, while the dollar index is trading near 107.7. Yields on 10-year Treasuries are trading near 4.52%, after briefly breaking through psychological support at 4.5% earlier this morning, while yields on 2-year Treasuries are trading near 4.21%. Crude oil prices are modestly higher this morning, after slipping to fresh four-week lows overnight. The grain and oilseed sector is mixed, with wheat prices steady to firm, while corn and soybean prices slip lower.
Gross domestic product grew at an annualized rate of 2.3% in the fourth quarter of 2024 in today’s initial data read, down from 3.1% the previous quarter, and below analyst expectations of 2.6% growth. Analysts expected a bit of a slowdown in economic growth in the fourth quarter, but this was a bit larger of a drag than expected, although the economy is still growing. However, personal consumption grew at an annualized rate of 4.2% in the fourth quarter, up from 3.7% the previous quarter, and well above expectations that it would slow to 3.1%. So, this morning’s data suggests that GDP growth slowed, despite an increase in consumer spending.
First-time claims for unemployment benefits fell to a nine-month low 207K in the week ending January 25, down from 223K the previous week, and below analyst expectations of 224K. The four-week moving average slipped to 212.5K claims, down slightly from 213.5K the previous week. Continuing claims for the week ending January 18 dropped by 42K to 1.858 million, while the four-week moving average rose by 6K to 1.872 million. There’s been an increase in volatility in the continuing claims numbers lately, but the weekly numbers remain low ahead of next week’s monthly jobs report. Overall, this morning’s data provided few clear signals of where the economy is going from here, as they provided fodder for both the hawks and the doves.
Jerome Powell reached his objective on Wednesday – he gave us a yawner of a meeting. That was intended, as I wrote yesterday. Yet, there were noteworthy comments and changes that bear mention. The Federal Reserve left its benchmark interest rate unchanged yesterday, following three consecutive cuts that saw the rate drop by 100 basis points. The pause was anticipated. Powell used the December meeting to cut the final 25 points of the above mentioned 100 points, but also used the meeting to reset expectations. The Federal Open Market Committee went the next step at this week’s meeting, removing the verbiage about inflation continuing to make progress. Fed Chair Powell stated that no policy shift was intended by the deletion, but rather they simply intended to clean up the language. But that explanation didn’t fly with many observers – me being one of them.
The FOMC tried to leave a sense that this month’s meeting was merely a pause, but it did express concern that inflationary pressures remain elevated. That problem may get a bit worse going forward as more data comes in for the first quarter. First, energy prices continued their December rise into January, although we’ve seen a pullback of late. But the most telling feature may be the recent history of first quarter inflation expectations that are increasingly seen in the 2-year Breakeven Inflation Rate history. Many businesses use the first quarter, and January in particular, to adjust price and wage schedules. As such, it’s common to see inflation expectations rise in the first quarter as those adjustments show up in the inflation data. As such, I wouldn’t expect a rate cut in the March meeting either. Fed fund futures are currently pricing in a rate cut in June, which is one meeting later than they were showing earlier this week. Don’t be surprised if we start hearing speculation about possible rate hikes by the March meeting, but much of that will hinge on President Trump’s policy successes and/or failures in the first 100 days. Regarding that, Powell wouldn’t speculate on the impact of those policies, but rather simply stated that the FOMC will wait and see what comes forward.
Wheat prices were steady to firm this morning, while corn and soybean prices slid lower, as traders corrected inter market spreads that were getting over bought. Managed money continues to build ownership of corn, and to some extent soybeans. The conviction at this point seems to be strongest for corn, where demand continues to impress, although these higher prices have many consumers considering alternative supplies. Higher prices ration demand, and we’re seeing some of that occur as more wheat and grain sorghum works into feed and ethanol consumption. Lower Argentine export taxes also increase the competition. South American weather continues to trend in the right direction as well. There will likely be some losses from the January dryness in Argentina and southern Brazil, but the improving weather trend suggests that losses will likely be moderated somewhat if this pattern shift verifies as expected in the weeks ahead.
