Stocks rallied on Friday after it appeared that lawmakers figured out a way to play nicely together. Inflation has not gone away yet according to the latest figures, out Friday.
Not too hot… but hotter than expected, nonetheless. Of course, I am referring to the latest read on inflation from last Friday’s Personal Consumption Expenditures (PCE) Deflator figure from the Bureau of Economic Analysis. The year over year figure came in with a print of +4.4%, greater than economists’ estimates of +4.3%. Not necessarily notable, HOWEVER, considering that last month’s read was +4.2%, the release bears a closer look. Traders already had a close look at those numbers as they quickly upped their bets on another +25 basis-point rate hike next month or in July. From last Wednesday through Friday’s close, probabilities of a June hike, according to futures shot from 36% to 69%. Colloquially speaking, that is from low probability to high probability. Why, because economic numbers show that the economy, though exhausted, is not falling to pieces. Adding to the Fed’s concern was Friday’s inflation figure.
When looking more closely at the numbers we see a few things worth noting. Firstly, let’s come up with a framework for looking at the number. Remember that the Fed has targeted +2.0% for inflation. Some inflation is necessary for a healthy economy and realistically, it is somewhat of a long-term average for the US. So, any figure that has a growth above +2% is unhealthy and vice versa, for less. The PCE Deflator is broken up into Goods and Services at the highest level. Under Goods, we have Durable Goods, which can be defined as something that would hurt if dropped on your toe (I didn’t come up with that geeky joke, it was some famous economist or money manager). Durables are high ticket items which last a long time, and those things, like Autos and Wash Machines were a big driver of inflation earlier in the inflation cycle, and those grew at +0.8%, so we can give that one a ✅. Next, we move on to Nondurable Goods, which are things that are consumed in the short-term, like food and gas (I tend to consume those rather…quickly). That group grew at +2.9% in the past year, so it gets an ❌. Virtually all sub-categories of nondurables are to blame. Food rose at +6.9%, Household Paper Products climbed by +11.9%, and Pets & Related Products jumped by +10.7%, to name but a few of the culprits. I am pretty sure that my family contributed to all 3 of those. Finally, we get to the Services category which was higher by +5.5%, showing no signs of slowing down, which earns it a ❌❌. That’s right, a double X, because not only is it causing us pain, but the Fed is keenly focused on it. Notable pain points in this category are Rent which remained at +8.9% for a second month, Motor Vehicle Maintenance which gained +13.3% since last year, and Food Services (AKA eating out ) which cost +7.7% more than it did last April. Interestingly, Hotel stays came down a lot since a month earlier, falling by -3.4% in a single month… good news if you are considering a vacation… assuming it sticks.
So, as you can see there are still plenty of places where products and services, particularly services, are eating into our pocketbooks and gnawing at the Fed’s desire to continue to tighten its grip. Yes, we are surely making progress, but not enough to call it a victory. Certainly not enough for the Fed to cut rates anytime soon. There are plenty of important numbers to ponder in the week ahead. Consumer confidence is an important factor in economic growth and, of course, inflation. We will get a read on that from the Conference Board today. Amongst the other releases this week, a slew of numbers on the labor market will be closely watched, culminating in Friday’s most important release of the monthly employment report. That will be on top of the Fed’s watch list, so it should be on the top of yours as well. We still have a few more days of rhetoric from FOMC members as a press blackout period begins on the midnight of the second Saturday before its next meeting. That starts next weekend. All eyes will be on that along with the hopeful congressional vote on raising the debt ceiling AND AVOIDING A POTENTIAL DEFAULT. It will not be a quiet week.
LAST FRIDAY’S MARKETS
Stocks rallied last Friday despite higher-than-expected inflation figures, because lawmakers were smiling for cameras… for a change. The S&P500 rose by +1.30%, Dow Jones Industrial Average climbed by +1.00%, the Nasdaq Composite Index jumped by +2.19%, and the Russell 2000 Index advanced by +1.05%. Bonds declined and 10-year Treasury Note yields declined by -1 basis point to 3.79%, butting up against a trend resistance line. Cryptos added +1.41% and Bitcoin gained +1.02%.
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