There’s no way to sugarcoat this: Inflation is hot and spending is outstripping revenue. Not pretty.
In January, the headline personal consumption index rose 0.6%m/m, well above growth expectations of 0.3% and above the revised reading of 0.2% for December. The December revision turned January into a second consecutive month of expansion.
At its core, PCE data for January, released on Friday, also added 0.6% mom growth – beating growth expectations of 0.4% and also down from 0.4% read in December has increased. This December revision turned January prints into a second consecutive month of expansion for core inflation.
Year-on-year, headline PCE grew 5.4% in January, up from 5.3% in December, and well above the 4.8% that economists were expecting. At its core, January PCE was up 4.7% year-on-year, after a revised 4.6% for December and also well above the consensus estimate of 4.3%.
As if that wasn’t enough, personal spending rose 1.8% in January, after a 0.1% decline in December and well above the expected 1.2% push. At the same time, personal income had absolutely no hope of keeping up, growing 0.6% in January, well below the expected 1% growth.
Mester tells it like it is
Cleveland Fed Pres. Appearing in a pre-opening interview on CNBC TV, Loretta Mester was as blunt as ever on politics: “I see we need to get interest rates above 5%. We need to find out how far above that. That will depend on how the economy develops over time. But I think we need to be a little over 5% and stay there for a while to put inflation on a sustainable downward path to 2%.”
A short time later, Mester appeared on Bloomberg TV after the data was released. Mester said bluntly, “Inflation readings are still not where we need them to be.”
The PCE report, she said, “just aligns with the fact that the Fed needs to do a little more on our policy rate to ensure inflation moves back down.”
My trader side wants the Cleveland Fed Chair to stop speaking publicly. My other side, the economist, wishes she would be considered for a seat on the board of governors and maybe even for the position of vice chair. Why? Because I know she’s right.
The ‘F’ words: Fed Funds Futures
Now that some of the dust has settled and we’re getting closer to lunchtime in New York, stock markets are down 1.25% to 1.5% by most measures. The Nasdaq Composite is down more than 2%. US six-month paper is now paying 5.06%. The Ten Year pays more than 3.95% again. The US Dollar Index rose above the 105 level and now stands at 105.25. Ouch.
In Chicago, futures markets are now pricing a 33% chance of a 50 basis point rate hike on March 22 and a more than 42% chance of a 5.5% to 5.75% final rate by July. No more rate cuts are priced in for the end of 2023.
Hot again, off again
Finally, January new home sales were at their highest since March 2022: hot, hot, hot.
Inflation slowed and then picked up. The economy slowed and then recovered. The Fed has not become any less aggressive. The Fed is still raising short-term rates. It is still methodically subtracting the monetary base and hence the M2 money supply. Domestic money supply, which was already too large. You can blame irresponsible legislators for that. Global money supply M2 has continued to grow this year…thanks to very loose policy in Asia. The Bank of Japan is going through a leadership change, so that could evolve. Who knows how keen China is to help?
As pulled from the St. Louis Fed’s website, last Friday’s Chicago Fed National Financial Index shows domestic financial conditions are as easy as they’ve been since February 2022. Imagine if the Fed hadn’t tightened.
Ultimately, the US may have to choose between economic growth and inflation above target or target inflation in the absence of growth. For now, growth is holding up, as is inflation at uncomfortable levels. This does not mean that the Fed has to tighten the monetary policy environment further, but that it can. It’s a matter of perspective. We all know that once interest rates normalize and the slope of the yield curve takes on a healthier complexion, this nation will be in a better position at that point.
It’s just that the pain that Fed Chair Powell was talking about almost a year ago hasn’t really started yet.
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