- CPI and PPI data released
- JPMorgan and Wells Fargo report earnings
- Boeing beats Airbus but slows deliveries
The Bureau of Labor Statistics (BLS) reported on Wednesday that the consumer price index (CPI) for March rose 0.1% from February thanks to a pullback in gasoline and natural gas prices. The so-called core CPI, which excludes food and energy, rose 0.4% last month which was slightly lower than the 0.5% increase in February. Compared to a year ago, the core measure was up 5.6% while the overall measure was up 5.0%. Note that a year ago prices for commodities were spiking thanks to the invasion of the Ukraine by Russian forces. The median estimate in a Bloomberg survey of economists called for a +0.4% core figure and +0.2% overall gain. While still elevated above the 2% target the Fed is hoping to achieve, CPI is showing some hints of moderating. Shelter costs, the largest contributor to the monthly advance, rose at the slowest pace since November of last year. This metric is expected to fall further in the coming months because leases that are being signed now are at lower levels than a year ago, but the government’s method of collecting data lags real time data by months in some cases. Grocery prices fell for the first time since September 2020, including the biggest monthly drop in egg prices since 1987! Used car prices also fell last month reflecting repaired supply chains and also demand hesitancy due to higher rates. Meanwhile hotel prices, airfares and household furnishings all rose. Core CPI has risen an annualized 4.7% over the last six months and 5.1% over the previous three months suggesting that price growth remains stubbornly higher than desired.
The producer price index (PPI) fell in March 0.5% from February according to data from the BLS. That figure was below all estimates in a Bloomberg survey of economists. Compared to a year-ago, the headline figure was up 2.7% matching the smallest gain in more than two years. The so-called core PPI, which excludes food and energy components, fell 0.1% last month translating into a 3.4% rise from a year ago. Most of the decline was due to an 80% drop in the price of gasoline while machinery and vehicle wholesaling margins slipped as well. The PPI is a measure of wholesale prices which feeds into final goods and services, so theoretically a slowdown in this pipeline should eventually show up in lower consumer prices. But individual components can be volatile month-to-month and the proposed OPEC+ production cuts for crude oil could lead to a spike in wholesale prices for this item in the coming months. Both consumer and producer prices will feed into the Fed’s favored indicator—the personal consumption expenditure deflator—which will not be released until April 28. That is the last major pricing indicator the Fed will receive before it releases its decision on rates on May 3.
Last week, the Labor Department reported that nonfarm payrolls rose 236,000 in March which was inline with forecasts. The unemployment rate fell to 3.5%. There were signs of cooling with annual wages rising at a slower pace and labor force participation rate edged up ever so slightly. All these items played a role in how consumers spend their money. Today retail sales data for March was released which fell for a second consecutive month. Sales declined 1% last month after an upwardly revised 0.2% decrease in February according to the Commerce Department. Eight of 13 categories fell led by general merchandise stores and electronics. Gasoline stations saw sales fall 5.5%, the most since April 2020. The only service-sector category in the report—restaurants and bars—was up slightly by 0.1%. The takeaway is that momentum is slowing in household spending due to tightening financial conditions and the cumulative effects of inflation that has been present for over a year.
Minutes of the latest Fed meeting showed that some officials considered skipping a rate increase but concluded that regulators had calmed banking-sector stresses enough to justify a quarter-point rate increase. Then there were other officials who considered an even bigger hike than the 25 basis points agreed to on March 22 because progress to date fighting inflation was not having the traction they were looking for. The meeting took place less than two weeks after the closure of Silicon Valley Bank (SVB), so the governors had to balance their inflation fight against ensuring financial stability. The Fed staff said it was now including a “mild recession” starting later this year “given their assessment of the potential economic effects of the recent banking-sector developments,” according to the minutes. This was a slight change from the last meeting when the chance of a recession was judged as 50/50.
The futures market is anticipating one more interest rate hike at the May 2-3 meeting. That would bring the federal funds target to 5.00%-5.25%. Philadelphia Fed President Patrick Harker said Tuesday he has long anticipated the central bank would need to raise interest rates to above 5% “and then sit there for a while.” Meanwhile, Chicago Fed President Austan Goolsbee said, “we also have to recognize that this combination could hit some sectors or regions in a way that looks different than if monetary policy was acting on its own” referring to tighter lending standards following the SVB saga. “While the full impact of this policy tightening is still making its way through the system, the strength of the economy and the elevated readings on inflation suggest that there is more work to do,” San Francisco Fed President Mary Daly said in a speech Wednesday.
So, for now, it remains a waiting game. The Fed is waiting on data. The data is dependent on the surveys collected which take time to distribute, collect and analyze. Meanwhile, trading continues each weekday, as usual, making bets on what the Fed may or may not do in the future. What is more important--anecdotes of what is happening now or hard data of past periods that is just a sampling and often gets revised? They both play an important part in making markets. When expectations are confirmed as right or wrong, activity happens. Right now, investors are leaning towards an economic slowdown at some point in the future but are not quite willing to place all their bets on that outcome. The insight we get from earnings reports on first quarter business activity will be an important ingredient in how future expectations are formed.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Steigerwald, Gordon & Koch, Inc. [“SGK”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from SGK. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. SGK is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the SGK’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.sgkwealthadvisors.com. Please Note: SGK does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to SGK’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a SGK client, please contact SGK, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.