Game On?

Powell: It is far too early to declare victory

Summary: Capital markets surged last week as the Fed signaled that they expect to cut interest rates next year. That expectation appeared in the SEP report issued by the FOMC. However, it’s worth noting that Jerome Powell’s comments in his press conference weren’t quite as dovish as the SEP suggested. Powell still said that “it is far too early to declare victory” and wouldn’t take additional hikes off the table. But inflation has come down a lot and there are some signs of deflation. We are probably at the peak for interest rates in this cycle.

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Macro

The FOMC expects rate cuts next year

"If the economy evolves as projected, the median participant projects that the appropriate level of the federal funds rate will be 4.6 percent at the end of 2024, 3.6 percent at the end of 2025, and 2.9 percent at the end of 2026, still above the median longer-term rate." - Federal Reserve Chair Jerome Powell

But Jerome Powell isn’t declaring victory quite yet

"It is far too early to declare victory, and there are certainly risks. It's certainly possible that the economy will behave in an unexpected way. It has done that repeatedly through the post -- in the post-pandemic period. Nonetheless, where we are is we see the things that I mentioned." - Federal Reserve Chair Jerome Powell

More rate hikes aren’t off the table

"...we added the word "any" as an acknowledgment that we believe that we are likely at or near the peak rate for this cycle. Participants didn't write down additional hikes that we believe are likely, so that's what we wrote down. But participants also didn't want to take the possibility of further hikes off the table." - Federal Reserve Chair Jerome Powell

The Fed thinks Inflation is still too high 

"Inflation has eased from its highs, and this has come without a significant increase in unemployment. That is very good news. But inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain." - Federal Reserve Chair Jerome Powell

Take this as a signal that the Fed is ready to start talking about thinking about lower rates

"...when it will become appropriate to begin dialing back the amount of policy restraint that's in place. So that's really the next question, and that's what people are thinking about and talking about...No one is declaring victory. That would be premature, and we can't be guaranteed of this progress. So, we're moving carefully in making that assessment of whether we need to do more or not. And that's really the question that we're on, but of course, the other question, the question of when will it become appropriate to begin dialing back the amount of policy restraint in place, that begins to come into view, and is clearly a topic of discussion out in the world and also a discussion for us at our meeting today." - Federal Reserve Chair Jerome Powell

Did we have a soft landing? The economy actually had a very strong year 

"I think forecasters generally, if you go back a year, were very broadly forecasting a recession for this year, for 2023, and not only did that not happen, that includes fed forecasters and really essentially all forecasters, a very high proportion of forecasters predicted very weak growth or a recession. Not only did that not happen, we actually had a very strong year, and that was a combination of strong demand but also real gains on the supply side" - Federal Reserve Chair Jerome Powell

Are we re-entering deflation?

"...we’ve moved into the deflationary period. So prices of most of the things we buy are dropping. So freight is down, oil is down. Power is down, paper is down, film resin prices are down. So we're getting some margin benefit currently that we haven't seen for a while...So how much of that we'll have to give back to the customers in the end remains to be seen. We will not keep all of it. That I can guarantee you. We will not keep all of it." - CCL Industries ($CCL.B) CEO Geoffrey Martin

"We had estimated that year-over-year inflation was in the 1% to 2% range. Our estimate for the quarter just ended, that inflation was in the 0 to 1% range. Bigger deflation in some big and bulky items like furniture sets due to lower freight costs year-over-year as well as on things like domestics, bulky, lower-priced items again, where the freight cost is significant. Some deflationary items were as much as 20% to 30% and again, mostly freight-related. TVs, the average sale prices have been lower while unit's been higher." - Costco (COST 0.00%↑) CFO Richard Galanti

"...we are seeing some favorable impact from deflation, but as I said, at the same time, we continue to incur increased costs in areas like warehousing, in areas like distribution. As a result of that, we are not seeing the margin improvement that we were expecting. So the deflation is happening, but it's incremental. It's not significant. But we are hoping that next year we should see some increased impact from deflation, both on the raw produce side as well as metal packaging, too, as we go into the next pack." - Del Monte Pacific ($DMPLF) CFO Parag Sachdeva

International