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Weekly Update 5/26/2023: Inflation Trends Up

  • Bureau of Economic Analysis Data
  • University of Michigan Inflation Survey
  • Fed Minutes
  • Debt Ceiling Latest

Consumption & Durable Oders & Michigan, Oh My!

Key data was released this morning from the Bureau of Economic Analysis concerning the latest personal income and spending data. Consumer spending rose 0.8% last month versus an expectation in a survey of economists by Bloomberg which called for a 0.5% rise. Personal income matched expectation with 0.4% growth from March to April. The Fed’s key inflation metric, personal consumption expenditures (PCE), rose 4.4% for the twelve months ended in April. That was slightly above the 4.3% rise expected. Excluding food and energy, the so-called core PCE was up 4.7% on a yearly basis which was a slightly faster pace than March’s 4.6% annual pace. Most importantly, the “supercore” reading which measures the cost of services excluding food and energy rose 0.4% last month, the largest month-over-month advance since the start of the year. The 4.6% annual pace of this metric remains far above the 2% inflation target, and it is clear that this component will remain the stickiest and thorniest part of the inflationary puzzle the Fed will have to solve in order to meet their mandate of stable prices.

Durable goods are items which are meant to last longer than one year—so think airplanes, not toothbrush replacement heads. Total durable-goods orders beat expectations, up 1.1% in April following March’s 3.3% gain. The consensus called for a 1% decline so there was certainly a data surprise around this metric and feeds into the “higher for longer” theme around interest rates. Nondefense capital goods shipments excluding aircraft orders rose a more modest 0.5% versus a 0.2% decline in March. According to Bloomberg economists, although core orders surprised to the upside, underlying components do not suggest a broad-based uptick.

The University of Michigan conducts a survey each month asking participants where they think inflation is going over the next year and over the next 5-10 years. The expectation for inflation over the next twelve months is now 4.2%. That is down from 4.6% in April but still above the 3.9% from January’s survey. Over the next 5-10 years, the May sentiment called for inflation of 3.1% which was a little above the 3.0% April data point and January’s 2.9%. Thus, things seem to be trending slightly negative for those who are hoping for lower rates soon as detailed in the futures markets below.

Fed Minutes

The minutes of the May 3 Federal Open Market Committee (FOMC) meeting were released on Wednesday. They showed that participants were split over further rate hikes. “Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary,” minutes revealed. “Some participants commented that, based on their expectations that progress in returning inflation to 2% could continue to be unacceptably slow, additional policy firming would likely be warranted at future meetings.” Ultimately, the FOMC raised the benchmark federal funds rate to a target of 5.00%-5.25% in a unanimous decision. The question the markets are asking is “Will they pause?” On Wednesday, the odds of no change at their upcoming June 14 meeting were 66%. After today’s PCE reading, those odds have dropped to 42%. A week ago, those odds were closer to 72%. The odds of hiking another 25 basis points (0.25%) have risen from 28% last week, to 34% pre-PCE release this week to 58% today.

In the minutes, policymakers emphasized taking a data-dependent approach. Between now and the mid-June confab, there will be a number of key releases including the Job Openings and Labor Turnover survey, the monthly payroll and employment report for May and the latest consumer and producer price data. The Fed staff which provides macroeconomic reports to Fed governors forecasts a “mild recession starting later this year, followed by a moderately paced recovery.” According to the minutes, there was agreement that inflation was still running too hot. “Almost all participants stated that, with inflation still well above the committee’s longer-run goal and the labor market remaining tight, upside risks to the inflation outlook remained a key factor shaping the policy outlook.”

According to the Labor Department, initial unemployment claims in the two weeks through May 13 were revised down by a combined 50,000 and claims in the most recent week was below expectations suggesting the labor market remains strong. A revised first quarter GDP report this week from the Commerce Department showed the annualized pace up slightly more than the previous estimate including more household spending on services. With initial unemployment claims this week below expectations, it is somewhat counterintuitive that futures markets are still pricing in sharp cuts in the federal funds rate in the second half of the year. This implies either a sharp recession is just around the corner which runs counter to the fact that the labor environment is strong, and consumers are spending. It appears that a repricing of certain futures maturities is warranted. Stay tuned.

Debt ceiling

Talks continue so no deal yet. According to reports, negotiators were focusing on a two-year spending accord that would raise the debt ceiling for the same amount of time, extending it past the 2024 election. We are still expecting a deal to be struck in time to avoid missing principal and interest payments next month on Treasury securities. Make sure you are a regular reader of this weekly newsletter to stay up to date on the latest information.

Company Events

This section of the Weekly Update is reserved for current clients as it contains proprietary information regarding our core equity holdings.


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