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Weekly Update 9/30/2022: Markets Volatile as Quarter Ends

  • Personal income and spending data released
  • Boeing firms China orders
  • Apple production update
  • JNJ product gains wider approval

PCE Deflator, jobs and GDP

The Fed’s preferred measure of inflation, the personal consumption expenditure (PCE) index, rose 0.3% in August from July according to the Commerce Department which was above estimates. The annual gauge was up 6.2% compared to last August, also higher than forecast. Excluding the more volatile food and energy components, the price index rose 0.6% last month and was 4.9% higher than August 2021. Both monthly and annual core figures were above expectations and marked an acceleration in the pace seen in July. Personal income was in-line with consensus rising 0.3% but personal spending rose 0.4%, twice the 0.2% rate expected. The personal income pace was welcome because it was the smallest advance since the start of the year suggesting that consumers’ inflows are starting to slow. However, the personal spending rate remains a bit troubling because consumers still seem to be spending whatever they get. The personal savings rate was down to 3.5% while consumer debt is rising in the latest Commerce Department data. That is a classic pattern showing that consumers find it hard to turn off the spending urge and will dip into savings and/or increase debt to maintain that habit.

Initial unemployment claims fell unexpectedly to a five-month low according to data from the Labor Department yesterday. Applications fell by 16,000 to 193,000 in the week ended September 24, after downward revisions to the prior week data. The median estimate called for 215,000 new applicants in Bloomberg survey of economists. The four-week moving average fell for a fifth week to 207,000 suggesting that robust demand for workers continues even amongst economic uncertainty. If people continue to hold onto the jobs they have, that gives them funds to spend. Therefore, that trend gives the Fed further fuel to continue its rate hike policy in the hopes that it will lead to a slowdown in the labor market through higher unemployment and more filings for unemployment insurance. “The Fed will likely press forward with a stiff sequence of rate hikes given unacceptably high inflation readings, even if it means hiking into a slowing economy...The revised real spending trajectory raises downside risks for 3Q GDP growth,” said Bloomberg economists Andrew Husby and Eliza Winger in a report. Judging by this week’s comments (see below), that is exactly what they will do. The latest report on gross domestic product showed no change in the overall second quarter annualized decline of 0.6%, but it did show upward revisions to the PCE price index and core measure for the first and second quarters. According to a survey of economists on Bloomberg, GDP is expected to grow 1.6% in 2022 after a 5.9% boom in 2021. Next year’s growth is expected to be anemic at 0.8% here in the U.S. while major trading partner European Union is forecasted to slow to 0.6% given their geopolitical clashes and fiscal challenges.

Home Sales Data

This week there were further signs that the housing market is cooling. Sales of new homes unexpectedly rose last month according to the Commerce Department. Purchases of new single-family homes rose nearly 30% to a 685,000 annualized pace which was higher than the median captured in a Bloomberg survey of economists. Sales rose in all regions led by a 29.4% rise in the South. There were 461,000 new homes for sale at the end of the month, the most since March 2008. While the upside surprise seems like good news, at the current sales pace, it would take 8.1 months to exhaust the supply of new homes, compared with 5.7 months at the start of the year suggesting that the pace is slowing. The median sales price was $436,800, up 8% from a year ago, the smallest increase since November 2020 providing further evidence that the red hot market of 2020 and 2021 is fading.

That fact was further solidified by data from the S&P CoreLogic Case-Shiller National Home Price Index, which measures the average change in home prices across the country. From June to July, prices fell 0.3%, the first month-over-month decline since January 2019. The index reports on a two-month lag and reflects a three-month moving average. Since this is data from July, it is all but certain things have softened given the continued rise in mortgage rates. According to housing finance agency Freddie Mac, the average rate on a 30-year fixed-rate mortgage was 6.29% in the week ended September 22, up from 2.88% a year earlier. Price growth decelerated in all of the 20 cities. The fact that lumber prices have fallen to levels before the pandemic shows that demand for building products is fading. There is sure to be spillover effects on other areas of the economy from this slowdown given housing’s importance to the country’s economic profile.

Fed Thoughts

Just because there is no regularly scheduled Federal Open Market Committee (FOMC) this week does not mean various Fed members did not give their opinion on monetary policy. Federal Reserve Bank of St. Louis President James Bullard said this about inflation at an economic conference in London this week: “This is a serious problem and we need to be sure we respond to it appropriately. We have increased the policy rate substantially this year and more increases are indicated,” in the Fed’s latest forecasts. Fed Chicago President Charles Evans said in a CNBC Europe interview he favored continued hikes, though he also said he could see rates peaking in March followed by a pause in any moves and possibly declines. “By spring of next year we are going to get to a funds rate that we can sort of sit and watch how things are behaving,” he told the media outlet on Tuesday. “And if inflation starts to come down, things will be more restrictive and we would want to adjust downward.” The markets would love a pause, especially since given the recent path, the benchmark rate would be very close to 5% by then from its current range of 3.00%-3.25%. Nevertheless, the Fed works by committee and there are plenty of members who are full speed ahead on slowing down. Federal Reserve Bank of Cleveland President Loretta Mester said the US central bank has to keep its hawkish bite. “Real interest rates -- judged by the expectations over the next year of inflation -- have to be in positive territory and held there for a time,” she said yesterday in an interview on CNBC. “We’re still not even in restricted territory on the funds rate.” Federal Reserve Vice Chair Lael Brainard was at the New York Fed conference titled “Financial Stability Considerations for Monetary Policy.” This morning she commented: ““It will take time for the full effect of tighter financial conditions to work through different sectors and to bring inflation down. Monetary policy will need to be restrictive for some time to have confidence that inflation is moving back to target. For these reasons, we are committed to avoiding pulling back prematurely.” The next FOMC meeting is November 2 where another 75 basis point (0.75%) hike is currently being priced in by futures traders. Mark your calendars!

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