The Fed uses many inflation gauges to develop its forecasts. An important one that Powell has flagged many times is inflation expectations. However, there is a weakness in using inflation expectations as an input to the Fed’s forecasts. Inflation expectations are collected from two primary sources: markets and surveys. Both traders and individuals have political biases that impact their economic outlook.
The graph below, from the latest University of Michigan consumer survey, highlights this problem. As it shows, Republicans think inflation will fall rapidly over the next year. Given the abrupt drop since November, they must assume this will be due to Donald Trump’s policies. Despite having heard the same policy proposals, Democrats now forecast inflation will surge. The Fed must be careful in assessing inflation expectations as political bias, as we share, can skew forecasts drawn from market and survey expectations.
What To Watch Today
Earnings
- No Earnings Releases Today
Economy
Market Trading Update
We hope that you had a very Merry Christmas. As hoped, Santa Claus may indeed be coming to “Broad and Wall” with a decent rally on Tuesday’s holiday-shortened trading day. This morning, futures are modestly lower, which is unsurprising, given the 1% gain previously; however, we could see early morning weakness get bought by traders looking to position for year-end.
The bulls are in a good position to close out the year, as the market has cleared resistance at both the 50- and 20-day moving averages. Relative strength and overall market breadth improved, and the MACD “sell signal” has started to reverse. If the rally continues today, then we should be in a good position for it to persist through year-end and into the first two days of January, which comprise the entirety of the “Santa Rally.”
Trade accordingly.
CRE Markets Need One Thing: Rate Cuts
The Fed has been cutting rates, and longer-term mortgage and other borrowing rates are down about 1% from recent highs. However, distress in many real estate sectors continues to worsen. The graph below, courtesy of CRED iQ, shows that 16% of office loans are delinquent. What’s worse is that the number continues to climb. Despite the supposed shortage of multifamily properties, the percentage of delinquent properties is also worrying. Industrial and storage facilities seem to be in good shape.
The Fed will likely need to cut rates significantly to reverse the multifamily and office space trends. Deteriorating bank balance sheets and income statements, which have largely yet to be seen, would hasten such action. However, economic growth and inflation forecasts stand in the way of substantial rate cuts next year. Last week, the Fed surprised the markets with a more hawkish stance, projecting higher inflation and fewer rate cuts in 2025 than expected. Thus, distress in the commercial real estate market may continue through 2025, barring an abrupt deterioration in the economic outlook.
A Comprehensive Guide to Retirement Planning for Every Stage of Life
Planning for retirement is a lifelong journey that evolves as you progress through different stages of life. A well-thought-out strategy not only ensures financial security but also helps you achieve the lifestyle you desire during your golden years. This retirement planning guide breaks down the process into manageable phases—from early career to post-retirement—emphasizing the importance of goal setting, saving strategies, and investment options tailored to each stage.
Tweet of the Day
“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.”
Please subscribe to the daily commentary to receive these updates every morning before the opening bell.
If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.
