Dear Friends,

In recent weeks we have seen investors become more skeptical that the Federal Reserve will cut interest rates as soon as March resulting in volatility in the markets. That skepticism was offset on Friday by optimism in the Tech sector which propelled the major U.S. stock indexes upward with the S&P 500 reaching a new all-time high. Find out more about what’s driving the economy and financial markets in this week’s newsletter.

Economy, Geopolitics, and Commodities

1. Americans Begin to Believe Inflation Is Cooling​​

It matters that inflation is lower now than it was a year ago. It also matters that people’s inflation expectations are moving lower. The Labor Department on Thursday reported that consumer prices rose a seasonally adjusted 0.3% in December from November, putting them up 3.4% from a year earlier. That compares with a 3.1% year-over-year increase in November. But core prices, which exclude often volatile food and energy items to better capture inflation’s underlying trend, were up 3.9% from a year earlier—the first time they have risen less than 4% since May 2021.

The cooling trend seems likely to continue. One reason why is that the Labor Department’s measure of housing costs for both owners and renters is derived from rents, but it significantly lags what is happening with rents on newly signed leases. New rent prices have been cooling significantly, as seen in data from private providers such as Zillow, as well as a new tenant rent index that the Labor Department has begun producing. This has yet to fully show up in the inflation report’s measure of shelter prices, which was up 6.2% from a year earlier in December, accounting for 2.1 percentage points of the increase in overall prices. Policymakers care about inflation expectations because they believe those expectations can feed into actual inflation. If workers believe that high inflation is here to stay, for example, they will agitate for wage increases above and beyond the price increases they have already seen. Similarly, businesses will raise prices to head off the margin squeeze they expect. And so inflation becomes a self-fulfilling prophecy. If Americans are expecting less inflation, it becomes more reasonable to expect the Fed to cut rates.1

2. New Housing Completions and Building Permits Rise

According to a new residential construction report by the US Census Bureau this Thursday, privately‐owned housing completions in December were at a seasonally adjusted annual rate of 1,574,000. This is 8.7 percent above the revised November estimate of 1,448,000 and 13.2 percent above the December 2022 rate of 1,390,000. Single‐family housing completions in December were at a rate of 1,056,000; this is 8.4 percent above the revised November rate of 974,000.

Privately‐owned housing units authorized by building permits in December were at a seasonally adjusted annual rate of 1,495,000. This is 1.9 percent above the revised November rate of 1,467,000 and 6.1 percent above the December 2022 rate of 1,409,000. Single‐family authorizations in December were at a rate of 994,000; this is 1.7 percent above the revised November figure of 977,000. An estimated 1,469,800 housing units were authorized by building permits in 2023. This is 11.7 percent below the 2022 figure of 1,665,100.5

3. Tokyo’s January Core Inflation Seen Falling Below 2%

Core consumer inflation in Japan’s capital Tokyo in January likely fell below 2% for the first time since May 2022, a Reuters poll of economists showed on Friday, reinforcing the view that price pressures are easing. The core consumer price index (CPI) in Tokyo, a leading indicator of nationwide inflation trends was expected to have climbed 1.9%, according to a median estimate of 18 economists, attributed to a slower increase in energy and food prices. That would follow a 2.1% jump in December.

Japan’s December core inflation was above the Bank of Japan’s 2% target at 2.3% growth, but its pace slowed for a second straight month, government data showed on Friday. Meanwhile, the poll estimated Japan’s exports likely swung back to expansion in December, rising 9.1% from the same month a year earlier. That compared with a 0.2% contraction in November. December imports are seen down 5.3% from a year earlier after an 11.9% decrease in the previous month, resulting in a trade deficit of 122.1 billion yen ($824.05 million), the poll showed. “The rate of increase in the core index is expected to slow further as food price hikes have subsided and the upward contribution of accommodation prices is expected to contract,” said Takumi Tsunoda, senior economist at Shinkin Central Bank Research Institute.3

4. Business Leaders See No Recession in 2024

The 2024 World Economic Forum in Davos, Switzerland will wrap Friday. Billionaires and world leaders are flying home from Zurich or taking long weekends to ski in the Swiss Alps. Conversations at the annual gathering echoed the topics buzzing in the corporate world, from the promise or drawbacks of AI to the political risks clouding the global economy.

Overwhelmingly, economic experts and executives privately said they don’t expect a U.S. recession in 2024. The Fed’s potential interest rate cuts in the coming months, combined with rising consumer confidence, have led to optimism about the health of the economy – barring another major geopolitical crisis. Last year at Davos, crypto discussion dominated panels. This year, AI took over as the cool kid on the block. Up and down the Promenade, the main street in Davos, a swathe of companies were advertising their AI wares. Technology leaders, banking executives, and even musicians including Wyclef Jean and Will.i.am waxed poetic on the promise of AI. Willi.i.am even pitched his coming SiriusXM radio show featuring an AI co-host. Heads of global banks warned of inflationary pressures from increased shipping costs and the possibility of oil price rises. Bank executives fear the market is mispricing interest rate cuts, and that geopolitical risks could cause volatility. Consolidation of European banks was discussed behind closed doors, but executives say cross-border mergers are difficult to achieve without uniform regulation across the region. Selective mergers of national players were seen as more likely.4

5. Natural Gas Prices Remain Under Pressure Despite Cold Snap

Natural gas prices have been low this winter, helped by healthy production and unusually warm weather. The current winter storm could change that temporarily, but the long-term forecast is still for cheaper gas for U.S. consumers—at least for the rest of this year. The U.S. entered this winter heating season with the most natural gas in storage since 2020. It is still looking well stocked: As of the week ended Jan. 5, there were about 3.3 trillion cubic feet of natural gas in storage, 12% higher than the trailing five-year average, according to the U.S. Energy Information Administration. Even though the cold snap has helped move natural gas prices up 7.9% year to date to $2.51 per million British thermal units, they remain about 21% below year-earlier levels. Since November, the U.S. has been withdrawing natural gas from storage at a rate that is 28% lower than the trailing five-year average, according to the EIA.

Of course, the U.S. is just halfway through the typical natural gas withdrawal season, and the storm that started hitting large parts of the country on Friday brings the risk of both surging heating demand and freeze-offs that disrupt supply. But even after accounting for that and barring a wave of unusual cold in February and March, S&P Global Commodity Insights expects the U.S. to end March with about 1.9 trillion cubic feet of natural gas in storage, about 15% above the trailing five-year average. The natural gas industry really won’t be seeing much structural demand growth until 2025, when the next round of LNG terminals—those that liquefy gas for ocean-bound exports—are expected to start up. The U.S. is set to increase LNG export capacity by 49% in 2025, according to estimates from S&P Global Commodity Insights.1

Financial Markets

1. S&P 500 Rallies to Hit All-Time High​​

The S&P 500 closed at an all-time high on Friday as investors returned to buying equities in force in recent days following a short-lived market stumble to start the new year. The S&P 500 rose 1.23%, surpassing the prior intraday record of 4,818.62, which was set in January 2022. Meanwhile, the Dow Jones Industrial Average, which set its record at the end of last year, added 394.99 points, or 1%. The Nasdaq Composite advanced 1.7%. The smaller, more tech-focused Nasdaq-100 gained 1.95% to also hit a record high. All three major averages are now in positive territory for 2024, with the 30-stock Dow going green during Friday’s rally.

Treasury yields edged higher, with the 10-year yield settling at 4.145%, its highest closing level of the year. Spirit Airlines stock soared after the carrier raised its guidance and said that it was looking to refinance its debt and that the JetBlue Airways deal was still on. Financials, real estate, and consumer discretionary shares also climbed. More than 40 S&P 500 stocks were recently on track for all-time closing highs.3

2. Prologis Profit Rises as Occupancy Holds Steady

Prologis’s profit rose in the fourth quarter despite economic uncertainty. The San Francisco-based logistics-property landlord posted a profit of $630.9 million, or 68 cents a share, in the quarter ended Dec. 31, compared with $587.2 million, or 63 cents a share, a year earlier. Core funds from operations, an operating metric that strips out certain items, came to $1.26 a share, up from $1.24 in the prior-year period and in line with analysts’ estimates. Revenue rose 7.8% to $1.89 billion, beating the $1.85 billion expected by analysts polled by FactSet. Chief Executive Hamid Moghadam said the company sees uncertainties in the economic and geopolitical environment but is positive about the outlook for this year. Average occupancy was 97.1%, the same as in the previous quarter. Prologis is expecting a full-year 2024 profit of $3.20 to $3.45 a share, compared with $3.29 in 2023. The company is forecasting average occupancy of 96.5% to 97.5% for the full year.1

3. Ford Cuts Workforce Making Electric F-150s on Weak Demand

Ford Motor Co. said that it would reduce the number of workers making its F-150 Lightning truck as demand for electric vehicles continues to weaken. About 1,400 employees will be impacted as the Rouge Electric Vehicle Center transitions to one shift beginning April 1, the Dearborn, Michigan-based automaker said Friday in a statement. The company said it expects continued growth in global EV sales in 2024, though it will be less than anticipated. Last month Bloomberg reported that Ford would cut production goals for the F-150 EV in half this year. In a sign that traditional gasoline-powered vehicle demand remains strong, Ford also said that it was hiring nearly 900 new employees and adding 700 employees from its Rouge Complex for a third shift at its Michigan Assembly plant. This will allow the automaker to increase production of Bronco and Bronco Raptor sport-utility vehicles, and Ranger and Ranger Raptor pickup trucks. Ford shares fell 0.8% to $10.90 as of 9:38 a.m. in New York on Friday.2

4. Blackstone to Take Tricon Residential Private for $3.5 billion

Blackstone Inc. is betting some of the money from a record-breaking fund on rental housing, a corner of the real estate market it knows well. The company’s $3.5 billion deal to buy Tricon Residential Inc., a Toronto-based landlord, will plunge the asset manager deeper into a single-family rental industry it helped create more than a decade ago. The transaction signals that the undersupplied housing market remains an attractive target for investors as dealmaking picks up.

Blackstone famously led a charge of Wall Street firms buying houses in the aftermath of the US foreclosure crisis. While the firm’s initial effort ended in 2019 when it sold off its shares in Invitation Homes, it has continued to deploy capital into the industry. In 2020, the firm led a preferred equity investment in Tricon. The next year, it agreed to buy Home Partners of America, a single-family landlord that offers customers a path to homeownership through rent-to-own contracts. Now, it’s adding Tricon’s 38,000 US rental houses, as well as apartment buildings in Toronto and land slated for development. Blackstone’s $30 billion Blackstone Real Estate Partners X, which closed last year as the largest real estate drawdown fund, and Blackstone Real Estate Income Trust are combining on the deal. The company agreed to pay $11.25 a share in cash for Tricon, according to the statement Friday. Tricon shares surged on the news, climbing nearly 28% to $11.06 at 12:44 p.m. Friday.4

Sources:

(1) www.wsj.com

(2) www.bloomberg.com

(3) www.reuters.com

(4) www.cnbc.com

(5) www.census.gov

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Economic forecasts set forth may not develop as predicted.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.

Investing in stock includes numerous specific risks, including the fluctuation of dividends, loss of principal, and potential illiquidity of the investment in a falling market.

Investing in foreign and emerging market securities involves special additional risks. These risks include but are not limited to currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

Investment advice offered through Private Advisor Group, a registered investment advisor and separate entity from The Legacy Foundation.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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