A Healthy Economy May Delay Rate Cuts

It has been a quiet week for economic data releases, with investor attention remaining fixed on the timetable for future rate cuts. Over the past few weeks, we've highlighted the 'tug-of-war' between markets and the Fed regarding early rate cuts. Since Fed Chairman Jerome Powell's dovish commentary in December, markets had been pricing in a March rate cut above 50%, this has changed. Market sentiment, initially favoring a March rate cut (now below 50%), now leans towards a possible cut in June.

This change in narrative is primarily data-driven. As we discussed last week, economic reports have been consistently painting a picture of a healthy economy, allowing the Fed room to maintain a “higher for longer” policy to get inflation back down to target. On Friday, the release of the PCE Deflator came in softer than expected at 2.9%, marking the first time PCE has held a 2% handle since 2021. The phrase 'soft landing' has made its way back into analyst’s vocabulary this week, suggesting that the economy is achieving a balanced state.

It's difficult to argue against this perspective when considering solid consumer spending and a robust labor market, coupled with easing inflation as hinted by the PCE. With a plethora of economic data set to be released next week, it will be interesting to see which direction the narrative takes from here.