This Week in Financial Markets: 3.24.2024

1. Dovish Fed Keeps the Inflation Door Open

Per BofA’s FMS Survey, fund managers see "higher inflation" as the biggest tail risk. After the Fed meeting this past Wednesday, rightfully so.

POWELL: THE TWO INFLATION NUMBERS TOGETHER HAVEN'T CHANGED THE OVERALL STORY

The Fed is going to need to see a lot more inflation before taking rate cuts off the table. This in itself raises the probability of a continued rebound in inflation.

2. Goods Inflation Rebounding

We just saw a massive jump in 6-month ‘new orders’ forecast within the Philly Fed Manufacturing Index. The New Orders sub-index is now at its highest level since June 2021. Part of the story here is that in 2023, goods inflation came crashing lower while inflation on the services side (and housing) stayed elevated. Now, goods inflation (think manufacturing) and real economic growth is beginning to pick back up. This is supportive of higher interest rates on the long-end of the curve.

Interest rates on credit cards have soared to record high. Personal loans and auto loans have picked-up too, but too a slightly lesser extent.

Rates hikes have clearly hit bottom-tier consumers and corporations first. Stronger corporations have had more longer-term debt on their balance sheet from low rates in 2020-21 and have been able to ignore the colossal amount of rate hikes. Weak consumer on the other hand, are especially feeling the impact. Keep an eye on credit card defaults!

Part of the reason why corporations haven’t felt a large impact from rate hikes is due to debt maturities extended out into the future. Junk bond and leveraged loan issuers have cut their 2024-2026 maturity wall by 40% from a year ago, according to BOA estimates.

This has been a large driver of the recent rally. If corporations are able to refinance, current earnings matter less. Survive and extend! The horrible periods for markets tend to come when credit availability is frozen and few can refinance.