Rate cut odds ahead of CPI, QT more my focus at this point/Small business less optimistic/Other good stuff

We enter today's CPI figure, the headline of the week, with rate cut odds of 62% for June but if they don't in June, it's 100%+ for July. As for combining the next two meetings after March, we're pricing in a 46% chance of a 2nd in July if they go in June. By yr end we're still pricing in about 3. So, I know today's figure is going to shift these numbers around, stocks will have their thing in response, but won't change the likelihood of 1-3 cuts this year that have been fully priced in. Therefore, I continue to emphasize that at this point, the fate of the balance sheet should be the biggest priority of focus and which we'll get more clues next week as the Fed discusses it at the table. I keep mentioning the balance sheet because we're nearing a point where QT starts to exceed the reduction in the Fed's reverse repo facility and liquidity starts to drain as a result. With regards to asset prices, that is more relevant now than whether the Fed cuts once, twice, three times or not at all this year off a 5.33% effective fed funds rate. 

While there was no change in the one yr inflation outlook at 3% in the updated Consumer Expectations Survey from the NY Fed, the 3 yr and 5 yr guesses rose to 2.7% and 2.9% from 2.4% and 2.5% respectively. Expectations for another 3% annual rise in home prices remained the same. They ticked up for gasoline but fell for medical care, rent, and college and were unchanged for food prices at 4.9%.

With the unemployment rate at a 2 yr high as seen in the BLS report, the answers to the labor market were mixed. There was a drop to a 2 yr low in expectations for a lift in the unemployment rate but a higher expectation for the loss of one's job in the coming 12 months. And if one's job is lost, the mean probability of finding a new job fell to 52.5% from 54.2%. Income expectations were unchanged while spending expectations rose a touch. 

Of note, "Perceptions of credit access compared to a year ago deteriorated with a larger share of respondents reporting tighter conditions and a smaller share reporting looser conditions compared to a year ago. Expectations about credit access a year from now also deteriorated with a smaller share of respondents expecting looser credit conditions and a larger share of respondents expecting tighter credit conditions a year from now."

Bottom line, to add all the retail comments we've heard over the past few weeks, the higher end consumer is of course spending more freely than the lower end. The higher end is focused still on traveling, eating out, and other experiences while the lower end is much more 'choiceful', focused on value and promotions and sticking within a tight budget. Spending on services is the priority over stuff, and for many, needs not wants. And, the labor market tightness continues to loosen. 

The February NFIB small business optimism survey was less optimistic again, slipping to 89.4 from 89.9 and that was a print last seen in May 2023. It's also nearing again the lowest level since 2013 and for perspective, the 50 yr average is 98. To add to more evidence of the slowdown in hiring, Plans to Hire fell another 2 pts, after dropping by a like amount in each of the prior two months, to 12% and that is the least amount since 2016 not including Covid. Also, job openings shrunk to the lowest since January 2021. Compensation, both current and future, plans each fell with the latter at the lowest since March 2021. There was also a 2 pt drop in expectations for a capital spending increase to the lowest since April 2023. For those of us hoping for an inventory restock sooner rather than later, Plan to Increase Inventory fell 4 pts to the least in a year. Higher Selling Prices did fall by 2 pts to 21%, the least since January 2021, so at least good news on the inflation front.