THE FED
As expected, the Fed decided to keep the target Fed Funds rate at 5.25%-5.50%. This is the fourth meeting in a row where the rate remained unchanged. What did change, and in some ways significantly, was the Fed’s post-meeting statement. Most notably, the statement removed the language that previously left open the possibility of “additional policy firming.” In its place, the statement shifted its focus to potential rate cuts, noting that it will not “be appropriate to reduce the target range” until the committee has “gained greater confidence” that inflation is moving on a sustainable path toward its 2% target. Also, the statement now reads that the “risks of achieving its employment and inflation goals are moving into better balance.” In his post-meeting remarks, Chairman Powell noted that everyone on the committee is in favor of reducing rates this year, but they are looking to get more confident on the path of inflation before making any change.
Our Take: There were many changes made to the post-meeting statement, a departure from the normal tweak here and there. This could signal a more substantial change in thinking at the Fed. However, the Fed clearly outlined the need for continued improvement in inflation before it takes the first steps in cutting rates. For now, it appears the Fed will stick with its “higher for longer” stance.
EMPLOYMENT
Nonfarm payrolls rose by 353,000 jobs in January. Revisions to the previous two months’ reports added an additional 126,000 jobs. The unemployment rate remained at 3.7%, while labor force participation was unchanged at 62.5%. Average hourly earnings grew by 0.6% and are up 4.5% year-over-year.
Our Take: Employment growth far outpaced expectations in January. The jump in hourly earnings, some of which could be weather related, also surprised. In general, the report showed a continued strong economy and supports the Fed’s decision to hold rates steady for the time being.
COMMERCIAL REAL ESTATE
New York Community Bancorp (NYCB) reported fourth quarter results that included a large charge for building credit loss reserves, and the bank slashed its dividend. The reserve build was largely related to commercial real estate (CRE) loans. Regional bank equity indices fell and spreads on financial credits widened.
Our Take: The size of NYCB’s reserve build had a lot to do with last year’s acquisition of Signature Bank, which moved NYCB up to a size where it faces more regulatory scrutiny and exposed the bank to a lot of CRE loans that have issues more specific to NYC. However, many investors are concerned that NYCB is a canary in the coal mine that is indicating large future losses in CRE lending, where regional and community banks are more concentrated in their lending. Investors should leave a wide margin for error in any investments tied to CRE, especially office buildings.
CHINA
A Hong Kong court ordered Evergrande into bankruptcy and liquidation. The court determined that Evergrande would not be able to reach an agreement with its creditors on restructuring.
Our Take: The Chinese government’s willingness to let Evergrande fail and to push losses onto investors is an indication that the issues in the property market are too big for the government to insulate regular investors from the coming fallout.
MUNICIPALS
Airport passenger traffic surged in 2023, as approximately 942 million passengers boarded airplanes in the United States according to Bloomberg. This marks a 2% increase over the record high in 2019. Some airports, including Denver International and the New York City Airports (EWR, LGA, and JFK), reached record passenger levels in 2023.
Our Take: Airport municipal issuance is expected to increase in 2024. Due to the increase in airport passenger traffic, airports are now in a position to tackle capital improvement projects, facilities updates, and expansion needs after deferring or postponing infrastructure projects during and right after the pandemic.