| | | Market Snapshot
| Dow | 44247.83 | -154.10 | (-0.35%) | | Nasdaq | 19686.78 | -49.45 | (-0.25%) | | SP 500 | 6034.91 | -17.94 | (-0.30%) | | 10-yr Note | -2/32 | 4.221 |
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| | NYSE | Adv 1042 | Dec 1662 | Vol 972 mln | | Nasdaq | Adv 1664 | Dec 2605 | Vol 6.8 bln |
Industry Watch
| Strong: Communication Services, Consumer Discretionary, Consumer Staples |
| | Weak: Real Estate, Information Technology, Materials, Utilities, Health Care, Industrials |
Moving the Market
-- Ongoing profit-taking activity
-- Negative reaction to earnings and guidance from Oracle (ORCL)
-- Mixed action in mega cap stocks contributing to lackluster index moves
-- Rising market rates
| Closing Summary
10-Dec-24 16:30 ET
Dow -154.10 at 44247.83, Nasdaq -49.45 at 19686.78, S&P -17.94 at 6034.91
[BRIEFING.COM] The stock market extended this week's losses, reflecting ongoing profit-taking after last week's record highs and a huge run since the start of the year. The three major indices spent most of the morning near their prior closing levels before selling picked up in the afternoon.
The S&P 500 (-0.3%), Nasdaq Composite (-0.3%), and Dow Jones Industrial Average (-0.4%) settled near their worst levels of the day. Downside moves in the major indices coincided with some mega caps reversing early gains. NVIDIA (NVDA 135.07, -3.74, -2.7%), Amazon.com (AMZN 225.04, -1.05, -0.5%), and Eli Lilly (LLY 799.58, -4.00, -0.5%) were among the influential laggards after a big year of gains. NVDA shares are 171.7% higher in 2024, AMZN shares are 48.1% higher since the start of the year, and LLY shares sit on a 37.2% gain.
Significant moves were reserved for stocks with specific catalysts. Oracle (ORCL 177.74, -12.71, -6.7%) declined nearly 7% after a disappointing fiscal Q2 earnings report, missing the consensus EPS estimate compiled by FactSet, and issuing lower-than-expected guidance for fiscal Q3.
Conversely, Alaska Air (ALK 61.29, +7.13, +13.2%) surged after announcing an impressive three-year strategic plan during its Investor Day, alongside fiscal year 2025 EPS guidance that exceeded current consensus expectations. Alphabet (GOOG 186.53, +9.43, +5.3%) rose as much as 6.2% at its peak after unveiling its new Willow quantum computing chip. Also, Piper Sandler named the stock to a "Top Pick."
Kroger (KR 60.73, +2.96, +5.1%) was another story stock, jumping after a report indicating that Kroger's M&A deal with Albertson's (ACI 18.51, -0.43, -2.3%) was blocked by a judge.
The lackluster performance of the major indices reflected a sense of caution ahead of tomorrow’s release of the November Consumer Price Index at 8:30 ET. Treasury yields edged higher in anticipation of the report. The 10-yr yield settled two basis points higher at 4.22% and the 2-yr yield settled two basis points higher at 4.15%.
- Nasdaq Composite: +31.2% YTD
- S&P 500: +26.5% YTD
- S&P Midcap 400: +18.4% YTD
- Russell 2000: +17.6% YTD
- Dow Jones Industrial Average: +17.4% YTD
Reviewing today's economic data:
- November NFIB Small Business Optimism 101.7; Prior 93.7
- Q3 Productivity-Rev. 2.2% (Briefing.com consensus 2.2%); Prior 2.2%, Q3 Unit Labor Costs-Rev. 0.8% (Briefing.com consensus 1.9%); Prior 1.9%
- The key takeaway from the report is the inflation-friendly indicator of unit labor costs rising in more modest proportions in the third quarter.
Wednesday's economic lineup includes:
- 7:00ET: Weekly MBA Mortgage Index (prior 2.8%)
- 8:30 ET: November CPI (Briefing.com consensus 0.3%; prior 0.2%) and Core CPI (Briefing.com consensus 0.3%; prior 0.3%)
- 10:30 ET: Weekly crude oil inventories (prior -5.07 mln)
- 14:00 ET: November Treasury Budget (prior -$257.0 bln)
Treasuries settle with losses
10-Dec-24 15:30 ET
Dow -103.73 at 44298.20, Nasdaq -78.08 at 19658.15, S&P -18.64 at 6034.21
[BRIEFING.COM] The major indices are in a steady decline ahead of the close. Ongoing profit-taking activity has contributed to the broad selling interest.
The 10-yr yield settled two basis points higher at 4.22% and the 2-yr yield settled two basis points higher at 4.15%.
Market participants are waiting on November CPI tomorrow at 8:30 ET. Other data tomorrow include the weekly MBA Mortgage Applications Index at 7:00 ET and the weekly EIA Crude Oil Inventories at 10:30 ET.
Mega caps turn lower, weighing down indices
10-Dec-24 15:00 ET
Dow +7.08 at 44409.01, Nasdaq -58.92 at 19677.31, S&P -9.09 at 6043.76
[BRIEFING.COM] The stock market moved mostly sideways at the index level in recent trading. The S&P 500 (-0.1%) and Nasdaq Composite (-0.2%) trade near their worst levels of the session.
Many mega cap names gave up early gains or extended initial losses, weighing down major indices. Amazon.com (AMZN 224.77, -1.32, -0.6%), Microsoft (MSFT 442.44, -3.58, -0.8%), and Meta Platforms (META 613.54, -0.02, -0.01%) are standouts in that respect.
The Vanguard Mega Cap Growth ETF (MGK) traded up as much as 0.9%, but shows a 0.2% loss now.
Midday Summary
10-Dec-24 13:05 ET
Dow -36.86 at 44365.07, Nasdaq +19.95 at 19756.18, S&P -2.58 at 6050.27
[BRIEFING.COM] The stock market has exhibited lackluster action at the index level. The S&P 500 (-0.03%), Nasdaq Composite (+0.1%), and Dow Jones Industrial Average (-0.1%) trade close to the unchanged mark while the Russell 2000 sports a 0.3% gain.
Outsized moves are mostly reserved for stocks with specific catalysts. Oracle (ORCL 175.37, -15.09, -7.9%) shares are sinking after coming up shy of the fiscal Q2 consensus EPS estimate compiled by FactSet and issuing fiscal Q3 guidance that was below expectations.
Alaska Air (ALK 61.63, +7.44, +13.6%) is soaring after its impressive three-year strategic plan ahead of its Investor Day and FY25 EPS guidance that was above the current consensus estimate. Alphabet (GOOG 185.09, +7.99, +4.5%) is another winning standout, trading up as much as 6.2% at its high after yesterday's unveiling of its new Willow quantum computing chip. Also, Piper Sandler named the stock a Top Pick.
The lackluster moves in the major indices reflect some hesitation in front of tomorrow's release of the November Consumer Price Index. Treasury yields are slightly higher in front of the report, keeping buying in check in equities. The 10-yr yield is up three basis points to 4.23% and the 2-yr yield is up three basis points to 4.16%.
Reviewing today's economic data:
- November NFIB Small Business Optimism 101.7; Prior 93.7
- Q3 Productivity-Rev. 2.2% (Briefing.com consensus 2.2%); Prior 2.2%, Q3 Unit Labor Costs-Rev. 0.8% (Briefing.com consensus 1.9%); Prior 1.9%
- The key takeaway from the report is the inflation-friendly indicator of unit labor costs rising in more modest proportions in the third quarter.
ORCL sinks after earnings; ALK soars after three-year plan
10-Dec-24 12:35 ET
Dow +10.57 at 44412.50, Nasdaq +49.83 at 19786.06, S&P +4.53 at 6057.38
[BRIEFING.COM] The stock market is little changed at the index level over the last half hour.
Outsized moves are reserved for stocks with specific catalysts. Oracle (ORCL 175.37, -15.09, -7.9%) is a standout on the downside after coming up shy of the fiscal Q2 consensus EPS estimate compiled by FactSet and issuing fiscal Q3 guidance that was below expectations.
Alaska Air (ALK 61.63, +7.44, +13.6%) is a winning standout after impressing with the release of its three-year strategic plan ahead of its Investor Day and FY25 EPS guidance that was above the current consensus estimate.
Ollie’s Bargain Outlet surges despite modest earnings beat; Q4 outlook was reassuring (OLLI)
Ollie's Bargain Outlet's (OLLI +14%) is trading sharply higher after reporting Q3 (Oct) earnings results this morning. OLLI reported a slight beat on EPS. Revenue grew 7.8% yr/yr to $517.43 mln, which was generally in-line. This follows six consecutive quarters of double-digit revenue growth. The full year guidance was generally in-line.
- Comps declined a bit at -0.5% in Q3 with both transactions and basket down slightly. This was a good-sized drop off from Q2's +5.8% comp. However, OLLI was lapping a robust +7.0% comp. Demand for everyday consumer staples was strong throughout the quarter. Its best-performing categories were food, candy, housewares, and furniture. OLLI is also seeing growth in its younger customer demographic and retention of higher income customers.
- OLLI noted that its growing relationships with major manufacturers is leading to strong product flow and a more consistent assortment of merchandise. Consumers want value and suppliers need bigger partners. As the largest buyer of closeouts in excess inventory, OLLI says it's benefiting from these two trends. The growth of large retailers and suppliers has led to bigger order sizes, higher levels of excess inventory, and growth in the closeout industry.
- The company also explained that while it is getting larger, other closeout players are shrinking or going away altogether. This is leading to stronger vendor relationships and increased deal flow.
- Another positive is that OLLI has acquired a number of real estate sites that has bolstered its new store pipeline. This includes former 99 Cents Only stores in Texas, which were acquired out of bankruptcy in May. More recently, OLLI has acquired 17 former Big Lot locations. Similar to the 99 Cent Only stores, these stores are the right size, located in good trade areas, have attractive rents and leasing structures. OLLI sees the Midwest as an area that contains significant growth potential.
- Looking ahead, we think investors were pleased to hear OLLI say its Q4 (Jan) holiday outlook is largely unchanged. OLLI feels good about its positioning heading into the Christmas holiday. OLLI was pleased with its Black Friday weekend sales. Q4 is typically OLLI's largest revenue quarter of the year, so it's important and investors generally like what they heard on the call.
- A potential concern for OLLI is that direct imports from China account for approximately 50% of its product flow in any given year. Tariffs on China are a concern, but the company explained that its flexible buying model allows it to adjust pricing to reflect changes in the marketplace and pivot between different products. Another concern was the recent port strikes, but OLLI said that was a non-event.
Overall, OLLI's headline numbers and guidance do not warrant such a big move today. However, we think OLLI calmed some nerves about tariffs and the port strikes. Also, we think investors were bracing for worse given the hurricanes and consumers pulling back on discretionary items heading into the holidays. Looking ahead, recall that new CEO Eric van der Valk will take the helm on February 1 when current CEO John Swygert becomes Executive Chairman.
Toll Brothers' sliding gross margin takes a toll on shares as homebuilder ramps up incentives (TOL)
Shares of high-end homebuilder Toll Brothers (TOL) are for sale today following the company's upside Q4 earnings results that featured a familiar and less bullish trend within the industry. Although TOL is more insulated from affordability issues than most of its peers, such as D.R. Horton (DHI) or KB Homes (KBH), the company is still relying on incentives to support demand. After mortgage rates popped higher in September and October, causing the new home market to soften a bit, TOL responded by increasing its incentives, which is expected to cut into Q4 margins.
- Specifically, TOL guided for Q4 adjusted home sales gross margin of 26.25%, continuing a downward trend that's now becoming more of a concern for investors. In Q4, adjusted home sales gross margin of 27.9% did beat its guidance of 27.5%, but it was down from 28.8% in Q3. Given that many of TOL's customers are all-cash buyers -- about 28% paid all cash in Q4 -- the company is less impacted by high mortgage rates, but it's not completely immune.
- During the earnings call, TOL tried to ease those concerns surrounding its declining margins, stating it views its Q1 adjusted gross margin guidance as an anomaly from both a mix and incentive standpoint, adding that it expects Q1 to mark a low point for the year. With that in mind, the company stuck to its FY25 adjusted home sales gross margin guidance of 27.25%.
- TOL's Q1 Deliveries guidance of 1,900-2,100 units also looks underwhelming, equating to yr/yr growth of just 3.8% at the midpoint of the range. Deliveries growth is typically more modest in the seasonally slow Q1, but TOL did achieve stronger growth of 6% in 1Q24.
- On a more positive note, TOL has started to pull back on incentives recently as market conditions improve ahead of the start of the upcoming spring season.
- Furthermore, the company remains quite bullish on its longer-term outlook due to a few key factors. For instance, first-time homebuyers accounted for only 24% of the market over the past year, which is the lowest level in over 40 years. Therefore, the market is mostly comprised of move up, or move down buyers, who are financially secure and typically have significant equity in their current homes. This matches TOL's target customer. Additionally, a substantial supply/demand imbalance in the housing market remains, while the median age of an existing home in the U.S. is over 40 years old, making new homes a more attractive investment.
Affordability issues have finally caught up to TOL as the luxury homebuilder has had to boost incentives in order to keep demand humming. However, we don't view the slide in gross margin as a game-changing situation that significantly alters an otherwise bullish narrative for TOL. Demographic and industry-specific trends remain in its favor, while the prospect of lower rates in the year ahead should only strengthen demand further.
AutoZone heats up following a cold start as soft discretionary demand remained a drag in Q1 (AZO)
AutoZone (AZO +1%) heats up after its cold start today following back-to-back earnings misses in Q1 (Nov). The aftermarket auto parts retailer ran into similar headwinds from last quarter, primarily regarding its domestic DIY business, which continued to endure relative weakness across discretionary merchandise categories (accessories, tools, appearance chemicals, etc.).
This trend was likely expected given the management's warning in September that discretionary categories would remain under pressure until the end consumer sees some economic relief. AZO's rival O'Reilly Automotive (ORLY) also endured a similar trend during SepQ. Meanwhile, discretionary merchandise comprises only 17% of AZO's total sales, making it material but not substantial. Furthermore, the company is witnessing gradual improvements across certain trends and expects to gain market share over time in its domestic DIY and commercial businesses.
- While the macroeconomic environment continued to hinder overall results, AZO delivered sequential improvements in Q1, including total comp growth of +1.8% in constant currency, an uptick from +1.3% last quarter. When incorporating FX impacts, comps did slip from Q4 (Aug), coming in at +0.4% versus +0.7%.
- DIY comps were the drag, expanding by just +0.3%. However, compared to last quarter's -0.4% comp, domestic DIY growth improved nicely in Q1. Average DIY ticket was up 1.3% in Q1, a minor uptick sequentially. AZO anticipates this trend to persist heading into Q2 (Feb). DIY transaction count did fall by 1.8%, but this was still better than the 2.0% drop experienced in Q4. Management maintained its view regarding DIY comps, noting that sales will remain pressured pending economic relief.
- AZO saw most of the weakness in DIY across the Northeast, Mid-Atlantic, and Rust Belt regions of the U.S. Comps here slid by -1.8% compared to a -0.1% drop within the other domestic markets. This may not have been too surprising given the milder-than-normal weather in these areas. Auto repairs happen more often during cold and rainy weather.
- Commercial comp growth remained relatively healthy, jumping by +3.2%. However, this did represent a moderate drop from the +4.5% improvement posted last quarter. Unfortunately for AZO, the first four weeks of the quarter started off weak, primarily due to the hurricanes, whose impact was almost entirely on the commercial side of AZO's business.
- International demand remained a highlight, boasting a +14% pop in comp growth during Q1 when backing out FX fluctuations, which produced a 1,300 bp headwind. AZO remains thrilled over the future of its international stores, which are located across Mexico and Brazil. The company opened 11 stores in Q1, bringing its total to 932. AZO plans to open another 100 international stores in FY25 (Aug).
After an initial speed bump today, investors shrugged off another quarter of mild domestic DIY growth emanating from soft discretionary demand and instead focused on improving trends and sustained growth internationally. While domestic DIY demand could remain pressured over the near term due to the cumulative impacts of inflation, auto repairs can only be put off for so long. With a steadily aging fleet, AZO anticipates healthy demand over the long term.
MongoDBs slowing Atlas growth and CFO resignation take luster off beat-and-raise Q3 report (MDB)
Coming off a stellar beat-and-raise performance last quarter, and in the wake of an impressive earnings report from fellow data platform and analytics company Snowflake (SNOW) on November 20, expectations were high for MongoDB (MDB) ahead of last night's Q3 results. As anticipated, the company easily surpassed EPS and revenue expectations -- a feat it has accomplished in every quarter going back five plus years -- but a slowdown in growth for its key Atlas product and a surprise resignation of Michael Gordon, MDB's CFO and COO, is taking the luster off the blowout results.
- The main catalyst behind the top and bottom-line beat was MDB's non-Atlas business -- namely, the company's Enterprise Advanced (EA) product. That fact is dampening investors' enthusiasm over the upside results given that Atlas cloud growth is the most closely watched demand metric for MDB. On that note, Atlas revenue growth slowed to 26% yr/yr from 27% last quarter, accounting for 68% of total Q3 revenue compared to 71% of total revenue in Q2.
- Similar to SNOW's business model, Atlas's revenue is based on consumption, or usage, rather than subscriptions. During the earnings call, MDB stated that seasonal improvement in Q3 was more muted than in years past, resulting in consumption that was only slightly ahead of its expectations. On the flip side, EA revenue significantly exceeded MDB's expectations as the company had success selling incremental workloads into its existing customer base.
- The problem, though, is that MDB benefitted from the signing of several multi-year non-Atlas deals in Q3, and it doesn't expect that to repeat in Q4. Meanwhile, the company is also shifting a portion of its go-to-market investments from the mid-market to the enterprise channel, which will drive higher growth over time, but will likely create a headwind in the near-term due to slower direct sales customer growth.
- Still, MDB's Q4 EPS and revenue guidance of $0.62-$0.65 and $515-$519 mln did beat expectations by a relatively healthy margin. With MDB expecting to see Atlas yr/yr growth decelerate again in Q4, some may be viewing its outlook as overly ambitious, especially as the company navigates through a major executive shakeup.
- Michael Gordon, who has been at MDB for nearly a decade, will step down from both CFO and COO roles on January 31, while Senior Vice President of Finance, Serge Tanjga, will serve as interim CFO until a permanent successor has been hired. Not only does the change create some potential execution risks, but it also adds to the uncertainty and angst that has materialized in the wake of MDB's slowing Atlas growth.
The main takeaway is that while MDB's headline numbers look strong as it delivered another beat-and-raise earnings report, the upside results aren't resonating with investors because they were driven by MDB's non-Atlas business. Accordingly, concerns about consumption trends have returned to the surface, at the same time that MDB's long-time CFO has decided to step down, weighing on investors' confidence levels.
Casey's General fuels up after initially dipping today despite decent OctQ numbers (CASY)
Casey's General (CASY) is fueling up today, recovering from initial lows of around -2.7% following Q2 (Oct) results yesterday after the close. The fuel station and convenience store chain neared all-time highs leading up to Q2 numbers, the typical scenario for CASY throughout 2024. Against that backdrop, nitpicking can follow otherwise sound results.
Today's initially lackluster response likely stemmed from CASY reiterating its FY25 (Apr) outlook, including inside comps of +3-5%, inside margins comparable to FY24, and same-store fuel gallons sold to be between negative 1% and positive 1%, despite registering decent upside in Q2, including inside comp growth toward the high end of its full-year forecast and a modest uptick in inside margins. Also, trends for November were not noticeably impressive, with inside comps nearing the midpoint of CASY's FY25 outlook and fuel margins slipping toward the mid-to-high $0.30 range following over $0.40 in Q2.
Nevertheless, CASY's Q2 report showcased excellent management and a competitive edge in the gas station and convenience store market, a trend that has held strong throughout the past several years.
- For back-to-back quarters, CASY crushed earnings estimates while coming up short on revenue. Given its exposure to fuel, which can fluctuate depending on price and seasonality, revenue is more often hit or miss. However, as such, investors pay less attention to total sales, which dipped by 2.9% yr/yr to $3.95 bln, and more on earnings, which ticked slightly higher from last quarter to $4.85, and comp growth.
- Inside same-store sales ticked +4.0% higher in Q2, accelerating from +2.3% last quarter, with inside margins inching 50 bps higher sequentially to 42.2%. Prepared food and dispensed beverages led comps higher in the quarter, delivering +5.2% growth, supported by sustained momentum for hot sandwiches. Margins did compress by around 30 bps yr/yr due to higher costs associated with cheese, a lingering headwind. However, same-store grocery and general merchandise demand offset the modest margin contraction from prepared food.
- A differentiating factor for CASY is that its storefronts can sometimes be the only grocery and general merchandise option for local consumers without traveling miles away, acting similar to a Dollar General (DG).
- Same-store fuel gallons sold turned -0.6% lower in Q2, reversing a +0.7% gain last quarter. However, the figure was consistent with CASY's commentary regarding August trends and its FY25 guidance. Fuel margins were $0.42 per gallon. Management mentioned that it continued outperforming its geographic region on volumes, indicating that it is taking market share.
While not enjoying a gas-and-go response today, CASY remains in high gear. The company consistently delivers decent quarterly results, supported by its competitive advantages, including successful prepared food marketing and lucrative locations across the Midwest U.S. where consumers often commute relatively long distances to school and work. As a result, we continue to like CASY.
The Big Picture
Last Updated: 06-Dec-24 11:17 ET | Archive
Meet the 2025 FOMC
There are twelve voting members on the Federal Open Market Committee (FOMC): the seven members of the Board of Governors and five of the twelve Federal Reserve Bank presidents. The members of the Board of Governors are nominated by the President of the United States and are confirmed by the Senate.
The president of the Federal Reserve Bank of New York has a permanent vote on the committee, so the remaining four presidents with a vote rotate annually. They serve one-year terms beginning January 1 each year.
Other Federal Reserve bank presidents attend the FOMC meetings and contribute to the discussions, but they do not cast a vote for setting policy.
The Lineup
Whose names will you be hearing a lot throughout 2025? The seven governors are Jerome Powell (Chairman), Michael Barr, Michelle Bowman, Lisa Cook, Philip Jefferson, Adriana Kugler, and Christopher Waller.
Fed governors typically vote in unison with the Fed Chair. Fed Governor Bowman, however, shocked the world with a dissenting vote at the September FOMC meeting, preferring a smaller 25-basis points rate cut. That was the first dissent by a Fed Governor since 2005. If there is going to be dissension in the ranks, it usually originates among the voting Federal Reserve Bank presidents.
The names you'll want to be closely acquainted with in that realm include John Williams (New York), Austan Goolsbee (Chicago), Susan Collins (Boston), Alberto Musalem (St. Louis), and Jeffrey Schmid (Kansas City).
Each FOMC member would acknowledge that they are data dependent for their interest rate position, yet the market makes a living out of reading between their speech lines when thinking about what the FOMC will do with monetary policy.
Below we feature excerpts from recent speeches/interviews from the FOMC presidents rotating into a voting position (emphasis our own) to provide some flavor for their perceived policy tilt.
Austan Goolsbee
"I don't view the economy as perfect by any means. The strongest thing we've had going in the economy has been the job market. And the weakest thing in the economy by far has been the prices... You're never going to hear me or any other economist say tariffs are good.... Tariffs raise prices."
- In a November 21, 2024, Q&A at the Central Indiana Corporate Partnership:
"My view is that the long arc over the last year and a half shows inflation is way down and on its way to 2 percent. Labor markets have cooled to something close to stable full employment. Things are getting close to where we want to settle on both counts. It follows that we will probably need to move rates to where we think they should settle, too. We don’t need to get to that place immediately, but if we look out over the next year or so, it feels to me like rates will end up a fair bit lower than where they are today.
That’s my view of the general path ahead. But when there’s uncertainty or disagreement about where rates will eventually settle, it may make sense to slow the pace of rate cuts as we get close."
Susan Collins
"I expect additional adjustments will likely be appropriate over time, to move the policy rate gradually from its current restrictive stance back into a more neutral range. However, policy is not on a pre-set path. The FOMC will need to make decisions meeting-by-meeting, based on the data available at the time and their implications for the economic outlook and the evolving balance of risks... While the final destination is uncertain, I believe some additional policy easing is needed, as policy currently remains at least somewhat restrictive...
The intent is not to ease too quickly or too much, hindering the disinflation progress to date. At the same time, easing too slowly or too little could unnecessarily weaken the labor market... All told, I see the risks to my quite favorable baseline outlook as roughly in balance. Inflation is returning sustainably, if unevenly, to 2 percent, and to date, labor market conditions are healthy overall. Policy is well-positioned to deal with two-sided risks and achieve our dual mandate goals in a reasonable amount of time. The policy adjustments made so far enable the FOMC to be careful and deliberate going forward, taking the time to holistically assess implications of the available data for the outlook and the associated balance of risks."
Alberto Musalem
"I expect that inflation will converge to the FOMC’s 2% target and that additional easing of moderately restrictive policy toward neutral will be appropriate over time. Along this baseline path, it seems important to maintain policy optionality, and the time may be approaching to consider slowing the pace of interest rate reductions, or pausing, to carefully assess the current economic environment, incoming information and evolving outlook.
I favor a patient approach that focuses on returning inflation sustainably to 2% for several reasons: In the current environment, core PCE inflation is above target, the economy is strong and growing above its long-term potential, and the labor market is consistent with full employment. Also, the balance of risks around the price stability and maximum employment goals has shifted, and there is uncertainty about the neutral policy rate and productivity trends."
Jeffrey Schmid
The decision to lower rates is an acknowledgement of the Committee’s growing confidence that inflation is on a path to reach the Fed’s 2% objective—a confidence based in part on signs that both labor and product markets have come into better balance in recent months. While now is the time to begin dialing back the restrictiveness of monetary policy, it remains to be seen how much further interest rates will decline or where they might eventually settle.
I have discussed three long-term trends today: productivity, demographics, and debt. All three have implications for the long-run path of monetary policy, interest rates, and growth, but in different directions. Faster productivity growth could lead to relatively high interest rates and high growth; demographic trends point to low interest rates and slow growth; while debt dynamics suggest a combination of high interest rates and slow growth. All three factors are likely to be in effect, and the outcome for interest rates and the economy will be determined by the balance between them. As an optimist, my hope is that productivity growth can outrun both demographics and debt. But as a central banker, I will not let my enthusiasm get ahead of the data or my commitment to the Fed’s dual mandate of price stability and full employment."
What It All Means
The newcomers to the FOMC in 2025 are largely aligned in their thinking, which is that they seem to believe more easing is needed but that the Fed can afford to be more deliberate in removing policy restraint. In sum, we would categorize this presidential grouping as being more dovish-minded than hawkish-minded.
Of course, their policy leaning is based on what they know in more current terms. That could change if future data show inflation heating up since they are also aligned with the Fed's overarching view that policy is not on a preset course and that the risks to achieving the Fed's dual mandate of maximum employment and price stability are roughly in balance.
That is a helpful perspective for Fed Chair Powell who works intently on building a consensus at the Fed, as he won't have to start the new year anyway with some real "troublemakers" in the voting presidential mix. We jest with that description, but it can be said that none of the incoming presidents for the 2025 FOMC sound as if they are going to run strong interference with Fed Chair Powell's aim of building consensus.
They'll have their first vote at the January 28-29 FOMC meeting, but it won't be their first FOMC rodeo. They've already been in the room where it happens. The difference now is that they are the ones who will directly make monetary policy moves happen. That is why their thoughts will carry more weight with the market in the coming year.
-- Patrick J. O'Hare, Briefing.com
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