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78 and Sunny

| March 04, 2024

I was going to name this “PCE and Economic Conditions,” but I actually want you to read this – and 78 and Sunny certainly is more inviting! Speaking of, last week I was getting some much needed Vitamin D, so I can put up with the next couple months of Seattle gloom. I can report back to you that Hawaii is still sunny and 78 (like every other day!). The town of Lahaina is recovering, and things are opening back up and people are starting to resume their “new” normal lives. It is very sobering to see the destruction that is still there and you have no choice but to drive by the hundreds of burned out structures. It is sad.

But enough of that, as the title says, I am here bringing you the sunny forecast not just for Hawaii, but also for the economy. Near as I can tell, it appears to be sunny and 78 for the US economy too.

Wait…what?

That’s right.  The unemployment rate is still at 3.7% and new unemployment claims continue to come in in the low 200,000 range. Last week was 215,000. We will get our weekly update on Thursday, like every week.

The preferred inflation reading the FED looks at is the PCE (Personal Consumption Expenditures) index. It is supposed to be a better measure of things, with less reliance on the sticky housing number that we’ve been talking about. Here’s how that looked last week.

That is the ‘core’ PCE that excludes food and energy. Ok, so not at 2% yet, but not that far away. If you include food and energy, the number comes in even closer to that 2% target.

Earlier this year (a month ago), the market was pricing in five or six interest rates cuts from the Federal Reserve. Today, it looks like there are roughly 3-4 priced in by the end of the year.

There is currently a 60% chance that interest rates will be between 4.25% and 4.75% (above) by year-end, if the markets are gauging things correctly.

But remember what I was saying a few weeks ago. This appears to be the ‘no landing’ scenario.

Don’t get me wrong, that is a great outcome for the economy, for Main Street, and for most individuals. Very few, if any, layoffs (over the entire economy), wages can continue to go up, and everything generally seems to chug along just fine.

Remember, this is me bringing the 78 and sunny forecast, so I won’t talk about any clouds that may or may not be on the horizon.

But I will point out, like I did a few weeks ago, there is very little reason for the FED to lower interest rates when demand is holding up like it will in a ‘no landing’ scenario. That could be the one wrinkle in this. 

So the question remains, what will the effect of higher interest rates be on corporate profits?

At least so far, earnings for 4Q-23 have been pretty good!

98% of the S&P 500 have reported and 77% of them have beaten expectations, with an average beat rate of almost 7%.

Here’s an interesting statistic.

Two companies accounted for almost 2/3of the S&P earnings per share increase for the 4th quarter. Incredible.

Winding this up, if we continue to see things hold on economically, we should expect rates to stay higher for longer. There is less and less reason for the FED to cut those rates unless they see economic weakness. Profits are holding in there and if 96.3% of people have jobs that should bode well for consumer spending. I know, I’m not going to mention debt and all that other stuff. It’s sunny and 78!

That’s it for today, I hope you have a great week. If you have any comments or questions, please feel free to reach out to us.

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