It’s safe to say the Personal Consumption Expenditure (PCE) price index data released by the Bureau of Economic Analysis on Friday was a disappointment. The PCE price index was up +0.6% MoM and +5.4% YoY, well ahead of consensus estimates. In addition, one of the Fed’s most watched indicators, PCE core services excluding housing, was up +5.2% annually over the last three months. Moreover, personal income was weaker than expected (+0.6% vs. +1.0%) while Personal Spending was higher than expected (+1.8% vs. +1.4%), so consumers are earning less and spending more. The combination of both adverse reports led the markets lower, with considerable selling on Friday. The reaction is due to the implied narrative that inflation will be more challenging to beat and will take additional action from the Fed. Whether that comes from further rate hikes or leaving rates higher for longer, the belief is that the Fed will see this through.
While the newest inflation data was disappointing, and while it is necessary to control inflation, it’s important to remember that this is just one month of data. And you can’t make a trend with one data point. It’s easy to get caught up in the most current release and forget that the prior two months were up only +0.1% and +0.2% MoM. Combined with January data, the rolling three-month annualized number is +4.0%, considerably better than the +7.0% increases from mid-summer. So while the newest numbers were higher than expected, it’s always important to take a step back to look at the longer-term view, showing that inflation is still moving in the right direction.
Economy
- U.S. equity markets were decisively lower for the week ending February 24, with the S&P 500 down -2.7%, the Nasdaq down -3.3%, and the small-cap Russell 2000 down -2.9%. It was difficult sledding all week, culminating with Friday declines due to the hotter-than-expected Core PCE prices.
- Existing home sales in the U.S. which include completed transactions of single-family homes, townhomes, condominiums, and co-ops, declined -0.7% to a seasonally adjusted annual rate of 4.0 million in January, a twelfth straight month of decreases. It is the lowest reading since October 2010.
- The U.S. economy expanded an annualized +2.7% in Q4 2022, slightly below +2.9% in the advance estimate. Consumer spending rose +1.4%, the least since Q1 2022 and below +2.1% in the advance estimate. Spending on goods decreased -0.5%, revised from an initial estimate of a +1.1% rise, with declines across all areas. Spending on services went up +2.4%, but also below +2.6% in the advance estimate.
- Americans filing for unemployment benefits fell to 192k in the week ending February 18, below market expectations of 200k. The latest value remained close to the nine-month low of 183,000 hit at the end of January, proving that the U.S. labor market remains tight due to reduced labor force participation. This could force employers to raise wages to attract and keep staff, adding to inflationary pressures.
- The PCE price index rose +0.6% MoM in January, the most in seven months. The cost of goods went up +0.6%, recovering from a -0.5% fall in the previous month, while service inflation was steady at +0.6%. Food prices went up +0.4%, the same as in December, and energy prices surged +2.0% after falling -3.6%.
Stocks
- U.S. equities were in negative territory. Consumer Discretionary and Communication Services led the decline, while Energy and Materials outperformed. Value stocks led growth stocks and large caps beat small caps.
- International equities closed lower for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield increased 12 basis points to 3.94% during the week.
- Global bond markets were in negative territory this week.
- High yield bonds led for the week, followed by government bonds and corporate bonds.
