We had a few big economic releases this week in what will likely be the last major “hurrah” before year-end. Although, after reading the rest of this week’s update, you may be thinking otherwise! Retail sales rose 0.7% in November, slightly beating expectations, with big gains in autos (+2.6%) and online sales (+1.8%) thanks to strong Black Friday and Cyber Monday spending. However, spending was uneven, as 7 of 13 major categories rose while others, like restaurants and bars, fell 0.4%, their first drop since March. Core sales (excluding autos, gas, and building materials) increased 0.2% and are on track for a 4.2% annualized growth in Q4. Inflation remains a sticky problem, with “real” inflation-adjusted sales up only 1.0% in the past year, meaning people are paying more but getting less than they did in 2021.
On Wednesday, the Federal Reserve cut interest rates again by 0.25%, marking the third reduction this year and back to a target range of 4.25%-4.5%. These levels were last seen in December of 2022. But they signaled that future rate cuts would likely happen more slowly and cautiously, which caused some selling pressure on the markets. The Fed also updated its economic forecasts, projecting fewer rate cuts in 2025 (down to two from four) mostly due to rising inflation expectations. The labor market has cooled slightly, with unemployment projected to drop to 4.3% and GDP growth forecasted to improve to 2.1%. Cleveland Fed President Beth Hammack opposed Wednesday’s cut, preferring to keep rates unchanged. It is clear that opinions are starting to vary more widely than previously noted. During the press conference, Fed Chair Jerome Powell emphasized that election results had little impact on their decisions, as future policy changes remain uncertain.
This morning the Fed’s preferred inflation gauge, the Personal Consumptions Index (PCE Index) was released. The Index rose just 0.1% in November, indicating a 2.4% annual inflation rate, below the 2.5% forecast but still above the 2% goal. Core PCE, which excludes food and energy, also rose 0.1% monthly and 2.8% annually, both slightly below expectations. Goods prices showed little change, while services rose 0.2%. Housing inflation, a persistent issue, showed signs of cooling, increasing just 0.2%. Personal income and spending came in lower than expected, with income up 0.3% and spending rising 0.4%. Although Powell said Wednesday that inflation has “moved much closer” to the Fed’s goal, he said the changes in the projected path for rate cuts reflects “the expectation inflation will be higher” in the year ahead. Could that leave the door open to NO cuts in the coming year after all? This question has many of us guessing right now. Remember, the Fed was very late to raise rates in 2021/2022 and that caused a whole host of problems. Let’s hope they have learned from previous mistakes.
As of this morning, House Republican leaders are facing a looming government shutdown. A funding bill, intended to last through March, has collapsed under opposition from hardline conservatives and President-elect Donald Trump. Criticism of the bill, including its cost and a proposed pay raise for Congress, intensified after GOP donor Elon Musk publicly opposed it. Trump further complicated the situation by demanding the bill also raise the debt ceiling. The failure to pass the bill has not only increased the likelihood of a shutdown but also put House Speaker Mike Johnson’s leadership in jeopardy, as he struggles to reconcile party divisions and secure Senate support. Keep in mind that we have experienced shutdowns in the past, some last hours while a few have dragged on for weeks and even months. Our markets have largely ignored these issues knowing that resolutions will eventually come to fruition.
It is clear that the stage is being set for an epic battle in Washington in the year ahead. Tax changes and deregulation have the potential to boost businesses, while a thorough review of government excess could slow the outsized deficit spending that has propped up economic growth. The winners and losers in all of this will be a closely watched “drama” that is yet to unfold. We will, of course, be monitoring all of these events for potential impacts to our markets and broader investment holdings.
As you settle into the holiday spirit over the next few weeks, know that we remain here watching and preparing for the New Year ahead. Enjoy your weekend and upcoming holiday week!