The Fed’s Benchmark Rate Increase Driven By Personal Consumption Expenditure Inflation, and Pay Increases For Workers
The Federal Reserve preferred measure of inflation showed that prices continued to rise, which is good news for the people who want to know if high prices are over.
The Bureau of Economic Analysis reported Friday that there was a rise in the Personal Consumption Expenditures price index in August. That is believed to have played a part in the central bank raising its benchmark rate for the third time in a row earlier this month.
The latest economic projections of the Fed showed members were expecting inflation to stay up for longer than previously thought. Fed board members now expect PCE inflation to end 2023 at 3.1% and core PCE to finish next year at 3.5%, above the central bank’s target rate of 2%.
The Fed knows it is in a difficult situation. Inflation pressures are partly fueled by wage gains for workers. In an environment where the unemployment rate is at a half-century low of 3.5%, employees have been able to command big increases in pay to keep up with rising prices of consumer goods and services.
Wage growth was only 4.7% over the previous 12 months in October, which was cheered by investors. Wage growth grew again in November, up to 5.1%. Wage increases are expected to be 5% in December, according to economists.
Inflation is not solely a function of the price of oil or other commodities, it is also a function of many other costs. Inflation is related to the amount of money workers take home.
People will tend to spend their money more if they have more money in their wallet. Companies have more flexibility to raise prices.
The New Economy: What’s Happening in the U.S. Transportation and Retail Markets, and What It Means for Wall Street and Wall Street
Some people disagree with that assessment. The transportation industry has seen pay increases in the last few months. More workers at tech and retail giants have joined the labor movement.
The November PCE report showed an economy in transition. Tasked with reining in the highest inflation since the early 1980s, the Fed has undertaken a series of blockbuster interest rate hikes to squelch demand.
Retail sales have held up relatively well despite inflation pressures, but Norton warns that can’t last forever. American shoppers would eventually become broke and start buying essentials. A slowdown in consumption will inevitably lead to lower prices…but also slower economic growth.
The third quarter is mercifully over. The market has been doozy in recent weeks. September in particular was bleak. It was the worst month since the start of the Pandemic in March 2020.
But even though we’re seemingly in a bear market for everything as bonds, gold and bitcoin have all tumbled this year as well, there are some hopeful signs for the next few months.
The fourth quarter is typically a festive time on Wall Street. Investors tend to buy stocks in anticipation of robust consumer shopping during the holidays. Businesses spend more money to get their budgets under control. And major companies also often give rosy guidance in October about earnings expectations for the coming year.
Jeff Hirsch, editor-in-chief of the Stock Trader’s Almanac, said that October was a “bear killer” in a recent post.
MSSM Wall Street Beats Inflation: Wednesday’s Jobless Claims Expansion and Implications for the U.S. Economy
Traders will definitely be keeping close tabs on Washington this fall to see if Republicans gain control of the House. That could lead to more gridlock in DC, which investors tend to like.
Corporate America and investors are going to have to decide whether they are going to be so bullish in October because of concerns about interest rates and the global economy. After all, October is also famous for huge crashes, most recently in 2008 but also in 1987 and, of course, 1929.
Christopher Wolfe is the chief investment officer at First Republic Private Wealth Management. A lot of good companies are on sale. It’s a great time to be patient.
Thursday: US weekly jobless claims; earnings from ConAgra
(CAG), Constellation Brands
(STZ), McCormick
(MKC) and Levi Strauss
(LEVI)
The upcoming monthly jobs report will be watched closely for any signs that the labor market is cooling down, which could be a problem for the Federal Reserve in dealing with inflation.
There were hundreds of thousands of jobs created in last month. That would be the smallest monthly gain in nearly two years, and well below the average of more than 510,000 for the past 12 months.
Things are still robust relative to those pre-pandemic normal times. That is part of what is keeping inflation high.
Stagflation is unpleasant because of the risks of wages going down too much and too quickly. Stagflation is when the economy slows, while prices keep rising.
The Fed’s decision to raise rates isn’t going to help Wall Street but will strengthen the economy in the light of economic shocks
The bottom line. If Friday’s headline number comes in above 250K, Wall Street may read that as a sign the Fed is going to have to keep raising interest rates, adding to already-significant strain across financial markets.
It’s hard to overstate just how delicate the situation is. Kristalina Georgieva, managing director of the International Monetary Fund, described the world as being in a period of “historical shocks” after a torrent of economic shocks over the last two and a half years.
That’s why the Fed’s decisions are being so closely scrutinized. The Fed raising rates as aggressively as it has done in the past several months causes a domino effect around the globe, pushing the US dollar value up and making other central banks raise their rates as well. The UN warned of all of that could tip the world’s biggest economies into a recession.
Ford is, once again, raising prices on its first electric pickup, the F-150 Lightning. Citing “ongoing supply chain constraints, rising material costs and other market factors” the company said the entry-level model will be priced at around $52,000 — up significantly from $40,000 when the truck went into production this spring.
Nightcap: Musk and Twitter postpone the litigation over a $44 billion acquisition deal with Boston Dynamics, the maker of weird robotic video games
(Reuters) Belarus’ President Alexander Lukashenko banned consumer price increases across the economy, according to state media. “From today, any price increase is prohibited. Prohibited!” the president is quoted as saying.
(CNN Business) Lawyers for Elon Musk and Twitter have agreed to postpone Musk’s deposition in the court fight over their $44 billion acquisition agreement, a source familiar with the negotiations told CNN. Musk threw a curve ball earlier in the week, offering to buy the company under the original terms of his deal, in exchange for dropping the litigation. There are still problems to resolve between the two sides.
Boston Dynamics, the company behind those weird four-legged robotic video games, is making a vow not to weaponize their products and encouraging others to do the same. The company wrote a letter to customers stating it was worried that they might not believe them when they said they weren’t building an army that will destroy humanity. Thankfully, they said they weren’t doing that. Oh yeah, phew!
Source: https://www.cnn.com/2022/10/06/business/nightcap-jobs-report/index.html
What do we learn from Peloton and CNN about its failure to survive the 2021 Pandemic? An analysis by Bloomberg, CNN Business, Wall Street, and Reuters
After letting go of another 500 people, Peloton will be left with around 3,800 employees — less than half the number of employees it had at its 2021 peak. The company said the latest cut marks the last of CEO Barry McCarthy’s \major changes to restore the brand. And if it fails, McCarthy told The Wall Street Journal, Peloton likely isn’t viable as a stand-alone company. He’s giving it another six months.
CNN Business is owned by CNN. Amazon suspended roughly 50 workers at its only unionized warehouse Tuesday after they organized a work stoppage following a fire at the facility. Workers at the Staten Island facility said it was difficult to breathe after the fire broke out and that some parts of the building smelled of smoke. Workers walked off the job.
There is a chief economist at the Burning Glass Institute. He was the head of The Conference Board’s Labor Market Institute. His opinions are his own in this commentary.
A lot of economists and analysts say that the US economy has been strange this year. On the flip side, GDP growth has slowed significantly and there is the argument that it entered a recession. On the other hand, overall employment growth has been much stronger than normal.
The theme of this month can be seen in how traders reward firms for cutting jobs. With corporate layoffs making headlines each evening, you might think the consumer is strained. Maybe not much. Frank Newman, portfolio manager at Ally Invest, said in the report that demand is decent.
The industries are growing more quickly than normal because they are still healing from the Pandemic. Convention and trade show Organizers, car rental companies, nursing homes, child day care services, and others are all growing fast since they are still below pre-pandemic employment levels.
Next year will be very different. The industries that are still recovering will have reached pre-pandemic employment levels. Slower hiring may be the case with demand being saturated. Job growth isn’t likely to push it into negative territory. What will do that is monetary policy.
There are two ways to rein in the labor market: Either reduce demand for workers or increase the labor supply. But it’s hard to engineer a boost in labor supply. That takes the kind of legislative action needed to increase immigration, drive people into the labor force or grow investment in workforce training. This is likely to prove elusive in today’s polarized political environment.
“Today’s stronger than expected report illustrates the difficult task that still lies ahead for the Fed wrestling a resilient labor market and sticky inflation,” said Mike Loewengart, head of model portfolio construction for Morgan Stanley Global Investment Office. “While the number may be disappointing for investors hoping for a dovish Fed sooner rather than later, keep in mind it was the lowest reading in nearly two years.”
There was expected to be a rise in the unemployment rate. The unemployment rate is calculated using a separate survey of households rather than the employer survey used to count workers on the job.
Inflation, Labor and the Services Sector: Fed Policy Analysis and Forecasts of the November 4-4 Market Rate Resummation and Open Market Committee
Federal Reserve Chairman Jerome Powell has made it clear the Fed isn’t anywhere near ready to hit the gas on the economy by cutting rates. It would be positive if it removed its foot from the brake.
Several economists think the Fed could reduce the pace of hikes by half a percentage point, rather than three quarters of a point.
The 261,000 jobs report is a good one, he told CNN in an interview. However, he noted that while total employment is now above where it was before the pandemic, there are still some sectors, such as leisure and hospitality and public schools, where employment is not yet back to pre-pandemic levels.
“No matter how many jobs that I can get in front of this camera and tell you how we’ve added and how great they are, people are still feeling the struggle at the kitchen table,” he said. The Inflation Reduction Act of the Biden administration is trying to address rising prices.
The annual increases for both PCE inflation indexes hit their lowest levels since October 2021 and follows continued declines in other inflation gauges, such as the Consumer Price Index and Producer Price Index.
Friday’s report also showed that spending continued to rise in November, but at a much slower pace than in previous months. Spending was up 0.1% in November as compared to 0.8% the month before. Personal income increased by 0.4% in November, down from 0.7% in October.
Their outlook may have improved, but the economy is still weak. The sustainable growth of consumer spending depends on continued strength in incomes and labor markets.
Inflation has moderated in recent months, especially on items like goods as supply chain bottlenecks have eased and consumers focused more spending in areas like leisure and hospitality.
However, inflation within the services sector has been a little “sticky,” and not abating as quickly. Faucher noted that Friday’s PCE report showed the services index had a monthly increase of 0.4% and a year-over-year increase of over 11%.
While much of the services inflation is due to housing costs, which are rapidly reversing, the Fed is concerned that strong wage growth could fuel persistent increases in services prices and overall inflation, he added.
“The Federal Open Market Committee will continue to increase the fed funds rate in early 2023 until it becomes more apparent that the job market is cooling, and wage growth and services inflation are slowing to more sustainable paces,” he added.
Decline in Manufacturing Orders and a Break in Consumer Sentiment, Inflation Expectations, and the Conference Board’s Consumer Confidence Index
New orders for manufactured goods went down 2.1% in November, the biggest monthly drop since the start of the Pandemic.
New orders for aircraft and parts drove the decline, according to the report. New orders increased by 2%) without transportation.
Diane Swonk, chief economist for KPMG, reported Friday that core durable goods orders slowed but did not contract, reflecting growing uneasiness about the economy. The prelim reading for December suggests that manufacturing will be contracting in the year’s end. It is expected to be cold for the manufacturing sector.
The final consumer sentiment in December was up slightly from the preliminary reading, which was 59.1, but still below the final reading in November, which was 56.8.
The report showed the biggest improvement in sentiment about business conditions, while inflation expectations also improved by falling to 4.4% in December, the lowest reading in 18 months, according to the university. This is a vital data point for the Federal Reserve. If consumers think prices will stay high, they will be more likely to demand wage demands that will cause businesses to raise prices.
Earlier this week, the Conference Board’s consumer confidence index – another measure of how consumers are feeling about the economy – landed at its highest measurement since April 2022.
The Coldest Year for the U.S. Stock Market in 2023: A Statistical Analysis of First-Time Unemployment Benefits and CMB Anisotropies
It was a brutal period for the stock market, with roughly one-fifth of the value of the S&P 500 vanishing and the Nasdaq dropping by more than one-third. All three major US markets have had their worst years since 2008.
The numbers showed that first-time applications for unemployment benefits went up to 225,000. That is low historically and almost exactly where it was a year ago, long before the recession fears began.
“This is one reason to the be optimistic the economy could skirt a recession,” Moody’s Analytics chief economist Mark Zandi told CNN on Thursday. “Without mass layoffs, it’s unlikely consumers will stop spending and the economy suffer a downturn.”
Consumer prices soared by 7.1% year-over-year in November. At almost any other point in the past 40 years, that would be alarmingly high. This was the fifth straight month of improvement, but it was the second-coldest since June. It’s also the lowest annual inflation rate in nearly a year.
The risk of a recession is greatly reduced if this trend continues. But if inflation remains well above the Federal Reserve’s 2% target, that would be problematic.
Source: https://www.cnn.com/2023/01/02/economy/recession-or-soft-landing-in-2023/index.html
The First Month of Gas Price Rises: Why the Fed hasn’t Already Overdo it? CNN Business reports on the first month of gasoline price hikes in June
Gas prices soared above $5 a gallon for the first time in June. The national average for regular gasoline recently dropped to an 18-month low of 3.10 cents a gallon, but has been rising in recent days to around $3.22 a gallon.
But the trend has started to reverse on a monthly basis. Real wages have been growing faster than consumer prices, a significant shift that could give consumers firepower to keep spending next year.
The fear is that the Fed will eventually overdo it, raising rates so high and keeping them there for so long that it causes a recession — if the Fed hasn’t already done that.
CNN Business published a version of the story. Not a subscriber? Right here, you can sign up. The same link will allow you to listen to the audio version of the newsletter.
The Inflationary Season Revisited: Jobs, Employment Opportunities, and Wall Street Flexibility in a Strongly-Interacting Economy
The Federal Reserve is going to raise interest rates again on Wednesday. Is it another half-point hike or a quarter-point increase? And what about the rest of the year?
For the past few days, traders have been watching economic reports and stock market movements even more closely because of the latest inflation figures.
The weak report on the health of themanufacturing sector coupled with more signs of strength in the jobs market led to more market volatility.
The Department of Labor is expected to release reports this week on private sector job growth from payroll processor ADP and the Job Openings and Labor Turnover Survey. More jobs were available in November than the report showed.
“The persistent mismatch between labor supply and demand continues to put upward pressure on wages,” said Lauren Goodwin, economist and portfolio strategist at New York Life Investments, in a report.
Friday’s jobs report is likely to focus more on the number of workers earning a wage than the number of jobs created. Wall Street may do the same thing.
Major tech firms that have recently announced job cuts include Amazon and Meta Platforms. Amazon
(AMZN) confirmed late Wednesday that it was laying off more than 18,000 employees.
The hope was that consumers and businesses would continue to spend heavily on tech products and services, a notion that seemed valid as the economy quickly rebounded from a brief recession in 2020.
Tech companies may not have factored in the effects of inflation and rate hikes on their budgeting plans as recession alarm bells sound once more.
“As our revenue accelerated through the pandemic, we hired too many people leading into this economic downturn we’re now facing,” said Salesforce chair and co-CEO Marc Benioff in a recent note to employees.
“Companies that last a long time go through different phases. They’re not in heavy people expansion mode every year,” Amazon CEO Andy Jassy said in a memo shared with employees.
The global economy is not out of the woods: consumer price increases, energy prices, and job prospects in the UK and other epochs
The global economy is still not out of the woods. With China and other emerging markets particularly vulnerable, the head of the International Monetary Fund is worried about a downturn.
But CNN’s Anna Cooban notes that investors in Europe appear to be growing more hopeful that the pace of consumer price increases is starting to slow in France and Germany. The price of energy is going down.
Consumers continue to feel the effects of higher prices. The UK has its best December in the history of the supermarket giant, as British shoppers feel the pinch of inflation and flock to the German discounter. Brits bought more than 48 million mince pies, according to the company.
Several other job market indicators continue to show that the US economy is in no serious danger of a recession just yet. The number of people filing for unemployment benefits fell last week to its lowest level in nine months. There will be the weekly initial claims numbers on Thursday.
The workers will be reluctant to give up the bargaining power they have gained over the past year, according to a report.
Tech Stocks and Wall Street: The Good, the Bad, and the Ugly: How Productive can the Labor Market be in the Early Stages?
“Combine a strong labor market with a still substantial reserve of excess savings, and you have all the components in place to keep the Fed up at night,” Vaillancourt said.
Wall Street is clearly buying into the “soft landing” argument. Just look at how well tech stocks have done so far this year, despite a series of high-profile layoff announcements from top Silicon Valley companies in the past few months.
Some say that tech layoffs won’t be a problem. It seems that investors think cutting costs is a good idea for profits and that revenue will not be negatively affected by consumer spending.
So far, tech earnings season is not off to an inspiring start, with Microsoft
(MSFT), Intel
(INTC) and IBM
(IBM) all reporting weak results. But it’s important to note that that trio is part of the “old tech” guard while Apple, Amazon, Alphabet and Meta all have more rapidly growing businesses.
Daniel Berkowitz, senior investment officer for Prudent Management ASSOCIATES said that a set of much weaker-than-expected reports from the firms could hurt the market.
Last week, the company reported solid results, which may be a sign of good things coming from other tech companies.
Earnings from GE Healthcare, Franklin Resources, and So Fidelity will be released on Monday.
Wednesday: Fed meeting; US ADP private sector jobs; US JOLTS; China Caixin PMI; Europe inflation; earnings from AmerisourceBergen
(ABC), Humana
(HUM), T-Mobile
(TMUS), Novartis
(NVS), Altria
(MO), Peloton
(PTON), Meta Platforms, McKesson
(MCK), MetLife
(MET) and AllState
(ALL)