This week provided some insight into the course of monetary policy amid the ongoing uncertainty surrounding fiscal policy. Economic data provided reassurance that the labor market and consumer remain on a solid footing, while housing data also came in better than expected.
The Federal Open Market Committee (FOMC) concluded their second meeting of the year on Wednesday, where policy makers elected to leave the Federal Funds Target Rate unchanged at a range of 4.25 – 4.50%. The decision had been telegraphed leading up to the meeting as Chair Powell reiterated prior comments that the Fed is “well positioned to wait for greater clarity” on the effects of the sweeping changes to fiscal policy. Although recent survey data has shown a concern for inflation rising, the Fed believes any tariff-related inflation will be short term. The FOMC also announced it will be tapering its balance sheet reduction (or Quantitative Tightening), by cutting the monthly Treasury redemption cap from $25 billion to $5 billion per month. However, Chair Powell made a clear point that the monthly reduction was “technical” and related to supporting market liquidity and not a deliberate easing of monetary policy.
The Retail Sales report for February came in positive territory, however below consensus estimates, at 0.2% month-over-month and 3.1% year-over-year. Online sales increased 2.4% month-over-month, which was enough to counter a drop in gas station and restaurant sales and remain in positive territory after the unexpected decline in January. The Retail Sales Control Group, which strips out food services, auto dealers, building material retailers, and gas stations surprised to the upside rising 1.0% versus the consensus estimate of 0.4% month-over-month. The control group data feeds directly into the calculation for Gross Domestic Product, or GDP.
Initial jobless claims came in at 223,000 for the week and continuing claims at 1.89 million underscoring the resilience of the labor market. For the last three years, initial jobless claims have been averaging around 220,000, hovering near historical lows. However, continuing claims have not dipped below 1.8 million since June of 2024.
Housing related data was also positive for February with Housing Starts surging 11.2% month-over-month with over 1.5 million new starts while Existing Home Sales were also up 4.2% month-over-month beating expectations of -3.2%. Resales were concentrated in the west and south, where housing losses from natural disasters may have been a factor.
Treasury yields trended lower through the week with the 2-year down to 3.94% from 4.06% and the 10-year at 4.24% from 4.31% at the start of the week, bringing the 2-year/10-year yield spread to 30 basis points. We expect the yield curve to continue to steepen, led by lower shorter dated yields.
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