We Made It!
PCE and Labor Markets in Focus
Following five consecutive weeks of gains the S&P 500 finally took a breather, as Central Banks globally including England (+50bps), Switzerland (+25bps), Norway (+0.50bps), and Turkey (+650bps) raised their policy rates at a higher level than expected as inflation remains stubbornly elevated.
This aligns with Fed Chair Powell when he said before his testimony before the House Financial Services Committee last week that “inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go.”
This week, all eyes will be on the US labor market and PCE on Friday, which we discuss separately below given its significance as the Fed’s preferred measure of inflation, which will offer further insight into whether the central bank’s hawkish view on interest rates is justified (PCE discussed in further in-depth below).
On the jobs front, job creation remains strong, with many looking for answers about the labor market's resilience. Some Wall Street analysts expect to see some softness begin to emerge this summer, with the severance packages from the tech and media companies who were the first to announce layoffs late in 2022/early 2023 begin to roll off (employees who are laid off with severance are temporarily ineligible to apply for unemployment insurance) which creates a lag with initial jobless claims. We may be beginning to move past that lag, with initial jobless claims coming in at 264k during the week, leading to an increase in the 4-week moving average to 256k.
We’ve got off to a strong start to begin the new week with stocks surging on the back of a raft of upbeat data which showcased the continued resilience of the US economy despite a higher interest rate environment, with the Conference Board’s US consumer confidence index increased in June to the highest level since January 2022 and importantly, consumers 12-month inflation expectations dipped to 6.0% (from 6.1% in May), the lowest reading since December 2020.
Friday, June 30, Core PCE will be reported. This is the less volatile measure of the PCE price index. Core PCE excludes volatile and seasonal food and energy prices. Core PCE is one of the primary metrics the FED looks for about inflation. An increase in inflation can result in higher interest rates and a strengthening of DXY.
Similar to CPI, we are entering a period where both inflations measure YoY and need significant improvements in the MoM data to see continuous downward pressure on inflation. Last year, June was considered the peak of PCE, posting a YoY reading of 7.00%. Since then, PCE has decreased steadily until the April reading, which saw a minor blip up. Part of this is due to the ever-longing for sticky inflation through the shelter sector. For YoY data to continue downward, the price decline needs to come down faster than it did 12 months ago. This presents an issue, as the Fed may or may not have not enough rate hikes to create demand destruction that would prohibit this. Therefore, there is a scenario that if the rate of PCE MoM is not coming down quickly enough, then the YoY data will start to curl up again.
The current monetary policy of the Fed is based loosely on this line of reasoning. They wanted to wait to ensure that data for CPI and PCE, along with other vital metrics, came in along the expected forecasts. Since some of the data reflect modest downward inflationary pressure, the Fed will continue rate hikes later in the year. The only scenario that may allow rate hikes to come off the table would be if another banking crisis were to take place between now quickly and the end of July or if defaults would start to increase. Without dramatic scenarios suggesting a more significant underlying issue in the market, the economy will continue to snail along, and the Fed will continue rate hikes until they see PCE/CPI coming down MoM.
Currently, the forecasts and consensus for the Core MoM and PCE YoY/MoM seem to show modest declines. The previous Core PCE MoM was 0.4%, with a consensus and forecast of 0.3%. The PCE Price Index MoM previously was 0.4% with a forecast of 0.2%. Lastly, the YoY PCE Price Index is expected to come down from 4.4% to 4.1%, returning to values posted in March. Projections show that the Core PCE deflator should be at 3.5% by the end of the year.
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