The good news around inflation continues, with the Fed’s preferred inflation gauge moving lower once again in October. But is there a soft landing on the horizon? Let’s take a look.
The Bureau of Economic Analysis (BEA) released its new figures on Thursday, with the headline Personal Consumption Expenditures (PCE) price index showing zero change month-over-month and up only 3.0% from last year. The year-over-year change is the lowest reading since April 2021, a welcome sign that the disinflationary process is well underway.
And it wasn’t just the headline number that showed progress. Even the more stubborn Core PCE number was only up 0.2% from last month and 3.5% from last year. This, again, was the lowest annual reading since April 2021. Moreover, the more recent data shows continued deceleration, with both the 3-month change and the 6-month change up only 2.4% and 2.5%, respectively. Combine this with the current unemployment rate of only 3.9%, and this feels as close to a “soft landing” as possible.
But, as we all know, everything is complex, especially something as intricate and far-reaching as macroeconomics. So, while inflation is moving in the right direction and unemployment appears to be tame at the moment, the current combination of declines in Core PCE along with low unemployment has never been seen before (see the chart below). Every other time Core PCE has declined this much from the prior year, unemployment has increased significantly. So either this time is different, or we may soon be in for a dose of reality.
One indicator worth watching for this reality is the Department of Labor’s weekly release of continuing jobless claims. And this piece of data is definitely showing some cracks. While the weekly new jobless claims still appear relatively low, the number of continuing claims is still increasing. It now stands at 1.927 million, a fresh two-year high. And while the absolute number is low relative to history, the rate of change in continuing claims is up over 25% since last year. Historically speaking, every time this has happened, we were in a recession. And while this is undoubtedly no guarantee we are in or on the verge of a recession, it’s always necessary to keep your eyes focused on the road ahead.
At least for now, let’s hope what we’re seeing on the horizon is the soft landing and nothing else.
Economy
- Markets continue to push higher, with the S&P 500 up 0.8%, the Nasdaq up 0.4%, and the small-cap Russell 2000 up 3.1%. Core PCE was a bright spot this week as the disinflation process seems well and truly underway.
- The number of Americans filing for unemployment benefits rose to 218K in the week ending November 25, an increase from the revised 211K reported in the previous week but slightly below market expectations of 220K.
- Sales of new single-family houses in the U.S. fell by 5.6% to a seasonally adjusted annualized rate of 679K in October, well below forecasts of 723K, as the highest mortgage rates in two decades weigh on buyers’ affordability.
- U.S. GDP expanded an annualized 5.2% in Q3 2023, higher than 4.9% in the preliminary estimate and forecasts of 5.0%. It marks the strongest growth since Q4 2021.
Stocks
- U.S. equities were in positive territory. Real Estate and Materials were the top performers, while Communication Services and Energy lagged. Value stocks led growth stocks, and small caps beat large caps.
- International equities closed higher for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield decreased 25 basis points to 4.23% during the week.
- Global bond markets were in positive territory this week.
- Corporate bonds led for the week, followed by government bonds and high-yield bonds.
