Pro Perspectives 2/28/24





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February 28, 2024

We get the big inflation data tomorrow.  Remember, the Fed is watching its favored measure of inflation, likely to hit 2.3%-2.4% in tomorrow's report — as it continues to stairstep lower toward the Fed's target of 2%.
Going into last month's PCE report, which was December data (reported end of January), the 10-year yield was trading 4.11%. 
The data in that report showed that inflation continued to fall in December.  Two weeks later, we had January CPI.  It was the lowest reading of the prior seven months.  The core measure was the lowest of the inflation cycle.  After all of that, we go into tomorrow's report with yields higher, not lower (at 4.26%). 
Meanwhile, stocks are 3% higher than a month ago, and have continued to hug this trendline, which originated from October, when Jerome Powell verbally signaled that the tightening cycle was over. 
The most important difference going into tomorrow's report, relative to the prior PCE report:  On January 26th, the interest rate market was pricing in a 4.0% Fed Funds rate by year end.  It's now pricing in a 4.6% Fed Funds rate by year end.
So, the market has repriced to align with the Fed's guidance, which is inarguably very conservative (on the rate outlook) given that inflation is running just a few tenths of a percentage point from the Fed's 2% target.  
And remember, within the Fed's Summary of Economic Projections, they've told us where they think the Fed Funds rate should be, when inflation is at target.  As you can see below (framed in orange), it's 2.5%
The current Fed Funds effective Fed Funds rate is 5.33%.  Clearly, that's much higher/much tighter than where the Fed sees sustainable real rates.