Keep spending, keep losing

Stocks took a beating last Friday after inflation numbers came in hotter than expected, dashing the hopes of the hopeful. Fresh hawk talk added to the pain – what did you expect?

Who is really in charge here? I will start off with a chart of the Personal Consumption Expenditure Deflator (PCE Deflator). It is another measure of inflation and happens to be the one which the Fed favors most. I won’t get into the whys, but at a high level, the Bank believes the way in which the survey is conducted produces a more accurate result. I agree, but that is a discussion for another time. For now, take a look at the month-over-month PCE Deflator, and keep reading.

I intentionally showed you the monthly number going back to 2011 so that you can visually appreciate just how abnormal inflation has been these past few years. Most notable and most relevant to our wealth in 2023 is the right-hand side of the chart which shows inflation moderating in the second half of last year. That spurred hopes that the Fed would stop hiking rates soon. In fact, the bankers teased us with 2 smaller rate hikes recently which signaled that they were near the end of the pain-infliction phase. Most of those hopes were foiled on Friday with that larger-than-expected bump up in January’s number. Unfortunately, the release and its implications are consistent with what we have been hearing from Fed policy makers over the past few weeks. To sum up their comments: “inflation is still a problem, rates need to go higher yet, and they need to stay higher for longer.” Markets haven’t enjoyed hearing the hawkish commentary and have largely sold off in recent weeks as a result. Now, we have data to support it. So, what’s next?

First of all, it is important to note what it was that pushed the inflation figure higher in January. In the past few months, economists have been acutely focused on the rise in Services costs. Those have been skyrocketing since consumers shifted away from buying things to experiencing things as they unleashed pent-up demand for travel and entertainment. Also in that list are medical procedures that had been delayed during the pandemic, though not all necessary, I suppose we can add at least some of those to the experiences aggregate . So, last Friday, economists were somewhat surprised to see Goods prices jump by +0.6% in January. Goods prices have been falling, having logged declines of -0.2% and -0.5% moves for November and December, typically high-demand months. What we now postulate is that December was a month marked by bad weather which kept consumers out of retail stores and home for the holidays. This impacted sales and produced the pent-up demand which was unleashed in January. Retailers noted this and took the opportunity to raise prices. That brings us to the second of all.

It is retailers and suppliers that control prices. We know that they are struggling and expecting a rough road ahead based on what they have been telling us throughout earnings season. So, I suppose that you can’t blame them for exacting every last penny from us when they have a chance. Don’t get me wrong, I am not against capitalism or consumption, but I am simply trying to explain what may be behind this lates rash of inflation. Are you tired of rising prices, the brake-mashing Fed, and stock market declines? Just remember that you, as a consumer, represent one side of that important supply and demand equation. If you moderate your spending now, suppliers and retailers will have no choice but to lower prices. The solution… er, credit card, is in your hands.

FRIDAY’S MARKETS

Stocks fell on Friday after the release of the latest inflation figures dashed hopes of rate cuts anytime soon. The S&P500 slid by -1.05%, the Dow Jones Industrial Average fell by -1.02%, the Nasdaq Composite Index dropped by -1.69%, and the Russel 2000 Index slipped by -0.92%. Bonds declined and 10-year Treasury Note yields jumped by +6 basis points to 3.94%. Cryptos traded lower by -3.39% and Bitcoin lost -3.25%.

NEXT UP

• Durable Goods Orders (Jan) are expected to have declined by -4.0% after climbing by +5.6% in December.
• Pending Home Sales (Jan) may have risen by +1.0% after a +2.5% increase in the prior month.
• Dallas Fed Manufacturing Activity (Feb) is expected to have worsened to -9.3 from -8.4.
• Fed speaker: Philip Jefferson.
• The week ahead: Still, plenty of earnings along with regional Fed reports, housing numbers, Consumer Confidence, and PMIs. Refer to the attached economics and services calendars for times and details.