Coming into 2024, stock market investors were expecting 6 interest rate reductions by the Fed throughout the year. Year-over-year inflation had fallen, and Federal Reserve officials had signaled that cuts would likely begin this year. Inspired by lower interest rates, the stock market surged. In late October 2023, the S&P 500 Index was at 4,117. Fast forward to early April 2023, and the S&P was over 5,200, representing a 26% gain since the October low. While the market was expecting six rate cuts, the Fed had signaled only three for 2024. Market expectations and sentiment dominated the Fed view, and markets continued climbing.
The impetus behind lower rates was tied to inflation. At the start of 2023, the Consumer Price Index registered a year-over-year change of 6.6%. In October, when the market began its surge, the CPI had declined to 4.0%. In three quarters, inflation was trimmed by 2.6%. Since then, the progress on inflation has slowed considerably. From October 2023, when the market began its upward trajectory, the CPI is only lower by a magnitude of only .08. Basically, the CPI has been stuck just above 3%, not quite at the level of the Federal Reserve target of 2%.
Since disinflation has basically come to a halt, the market is now pushing the first rate cut back to July, with mixed probabilities for additional cuts beyond July. The last Fed Reserve meeting in March continued to point to three cuts for this year, but that was by a very slim majority. In that meeting, the Fed upped growth estimates of the economy and its inflation projections yet maintained an estimate of three cuts for 2024. Some suggested that this was counter-intuitive; higher inflation estimates, but no change in rate reductions. Since the Federal Reserve March meeting, some Fed officials are on record calling for fewer than 3 cuts: one recently calling for none, and a historically dovish one calling for only one cut. The yield on the 10-year Treasury is knocking on the door of 4.5%, up from 3.9% at the start of the year. This will keep interest rates on credit cards, auto loans, and mortgages higher for longer.
By the time you may be reading this, the latest CPI report will have been released (release is scheduled for Wednesday, April 10th). If we get a hot CPI number, meaning it comes in higher than expected, this will push interest rate reductions back even further. Markets will likely reduce rate reductions from 2 to perhaps one, or none. The stock market will likely be volatile. If the CPI comes in less than expected, markets will likely surge. One of the reasons for this surge started with last Friday’s U.S. payrolls report. The U.S. employment report was indeed a Goldilocks report. Jobs created surpassed all expectations, with the economy adding 303,000 jobs in March. Both the labor force and labor force participation rate increased by sizeable margins. Household employment also surged, reversing previous declines. Average hourly earnings slowed from the previous month, a key ingredient for the softer inflation story. The average workweek also increased, which when combined with the number of jobs and average wages, points to more fuel for the spending consumer.
Locally, Louisville Metro is seeing the slowest job growth since early 2020. Preliminary estimates from the Bureau of Labor Statistics show that Louisville Metro gained 3,500 jobs from February 2023 to February 2024. As a comparison, the metro area added approximately 15,000 jobs on an annual basis in early 2023. On a percentage basis, this puts Louisville Metro last among the Kentucky metro areas. In Indiana, three metro areas (Bloomington, Columbus, and Elkhart-Goshen) are observing negative changes in payrolls from the prior year. As we have discussed in previous columns, both states continue to face labor force growth challenges. The latest BLS metropolitan employment report showed that Louisville Metro also saw a decline in the labor force from the prior year. To be sure, these data are subject to revision, but the early data does show a slowing of job growth in the metro region.
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