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With a staff of over 400 economic Ph.D.s and seasoned leadership, many believe the Fed has a firm grasp on future economic and inflation trends. Accordingly, they must have a good idea of what the future holds for interest rates. Unfortunately, we share a little secret: the Fed’s latest Fed Funds forecast makes little sense. Consider the Fed’s current long-run GDP and PCE price forecasts, which are 1.80% and 2.00%, respectively. In 2019, before the pandemic, the Fed’s long-range forecast for GDP was 1.90% and PCE at 2.00%. In other words, growth prospects slipped slightly, but nothing materially changed. However, despite the same economic and inflation outlook, the lowest long-range Fed Funds rate forecast for the 19 Feb members is 2.40%, well above the average Fed Funds rate in the post-finance crisis era.
We noted that the low forecast is 2.40%, but consider the median is 2.90%, and the highest forecast is 3.80%. Why does the Fed think the Fed Funds rate will be significantly higher than their economic growth and inflation forecasts? We agree with the Fed forecast of sub-2 % economic growth and low inflation. Therefore, we also think Fed Funds will likely range between 0% and 2% over the longer run. Given that the Fed Funds futures market generally aligns with the Fed’s forecast and that the Fed and Fed Funds futures markets have poor prediction track records, the bond market may grossly overestimate future yield levels.
What To Watch
Earnings
Economy
Market Trading Update
As noted yesterday, the stock market remains bullishly biased and is reaching new all-time highs. The thesis is that the Fed rate cuts will benefit stocks by providing monetary accommodation at a time when economic growth remains strong. However, oil prices have continued to suggest that the economy is weakening. As economic demand weakens, so does oil demand. It is worth noting that oil prices have fallen over the last 50 years when the Federal Reserve cut rates, even during the “soft landing” of 1995. While much will depend on the aggressiveness of those rate cuts and, ultimately, the outcome for the economy, oil prices will be worth watching for clues as to the Fed’s success or failure.
Intel Is In Play
Intel shares are being bid up as rumors are floating around the market that Qualcomm is exploring a takeover of the chip company. Furthermore, it is reported that Apollo Global Management has offered to make a multi-billion dollar investment in the company. Per Bloomberg, the offer could be as much as five billion dollars.
From a share price perspective, INTC may seem like a bargain compared to its competitors, who have seen significant upside due to AI products. However, the second graph from SimpleVisor shows the company’s earnings have floundered over the last two years. Furthermore, despite the seemingly low price, the SimpleVisor fair value model calculation is well below its current price. The stock wasn’t up much on Monday despite the news. Might the market expect any investment or buyout to occur around current price levels?
SimpleVisor Analysis
The market breadth, as judged by the SimpleVisor relative sector technical scores, remains in good shape. Accordingly, the broad market rally may likely continue as judged by the number of relative scores near zero. However, the absolute score for a few sectors is getting moderately overbought. For example, discretionary, utilities, and industrials have scores approaching 80. Therefore, we may see those sectors cool off, allowing sectors with lower scores, such as energy, to play some catch-up.
The factor analysis confirms our sector analysis above. Note the tight grouping of factors around the zero y-axis, denoting good market breadth. Moreover, like the sector analysis, the absolute scores are creeping into overbought territory.
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