The PCE, or “personal consumption expenditures” is often referred to as the Federal Reserve’s preferred inflation gauge. PCE is a measure of the change in the price of goods and services purchased by consumers. In other words, it’s a measure of prices, spending, and consumer resiliency. Friday’s PCE data came in above expectations: a 4.4% increase year-over-year, up for a 4.2% increase from March. The core PCE (in economy data, core means “without energy and food”) went unchanged from last month’s reading — 4.6%.
On a monthly basis, both headline PCE and core rose 0.4%, versus a 0.1% and 0.3% gain in March. That, too, was above expectations — economists from Refinitiv expected an increase of 0.3% month over month. Additionally, consumer spending actually jumped 0.8% from April to March — double what was expected, given a big boost from new car spending, among other things.
In other words: Friday’s PCE shows inflation actually picked up in April, more than economists thought.
That isn’t the only measure of inflation that’s proving stickier than expected. Important to note: stocks are rallying anyway.
Jobless Claims Fraud Means a Sizeable Adjustment
On Thursday, news broke that a swell in unemployment fraud stemming from Massachusetts had inflated data from the past two weeks of jobless report data. That meant that May 20th rose only 3,000 — less than expected. It also meant that the previous two weeks were revised down by 50,000 claims in total. In other words: More people are employed than we thought.
The jobless report is exactly what it sounds like — weekly data about how many unemployment claims are being made. In the Fed’s fight against inflation, it has deployed a strategy in which it attempts to increase the unemployment rate.
If that sounds like it’ll bring pain in an environment where the cost of goods is higher than it has been — then good, says the Fed, who has promised exactly that: pain for businesses and households. That’s a quote from August of 2022’s Jackson Hole. The point isn’t pain for the sake of pain — it’s that if people are making less money, they won’t be able to afford expensive goods, forcing businesses to lower prices via the metrics of supply and demand.
Still, not every country has taken this strategy. The Bank of Japan for example has retained -0.1% negative interest rates since 2016, and is expected to leave that rate unchanged once again at its June meeting. As a result, while Japan’s CPI is rising, their stock market has soared to a 33-year high, and has more than doubled the YTD performance of the S&P 500. This is part of what has attracted legendary investor Warren Buffett to become a big investor in the Japanese stock market.
For better or for worse, it doesn’t work like that in the US. Now investors and economists are looking ahead to the June FOMC meeting and beyond to figure out what the Fed’s next move will be in the wake of this data.
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June Fed Response to Inflation: Good News and Bad News
Here’s the good news: When jobless claims began to soar three weeks ago, it left a bad taste in the mouth of investors who were starting to think, “this looks like a big sign of economic pain.” Many began renewing calls for a recession, with Wells Fargo calling for a 10% correction from current S&P 500 levels, with Bank of America and Morgan Stanley telling investors to back away ahead of a full-blown recession. Combine that with spending data that is above expectations, and somewhat anchored inflation metrics from Friday’s PCE, and you get a recipe for a stronger economy and a lower chance of a recession.
That’s the good news: A stronger economy. But the bad news? Don’t hold your breath for that “priced-in pause.”
This week saw several speakers from the Fed issue mildly hawkish comments. None were more hawkish than James Bullard, who said he foresees two more rate hikes coming in 2023.
That brings us to the market’s new Fed rate expectations: Fed funds futures are now pricing in a 54% chance of a 25bp rate hike at the June meeting — that figure was just 20% last week. Fed funds futures are also pricing in a 43% chance of a rate hike in July, up from just 7% last week. And lastly, expectations of a rate cut in 2023 are moving closer and closer to “off the table” status — the possibility of which were priced into the September meeting.
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The Wrap Up: Data Leaning Bullish
That’s not an opinion: The stock market is the ultimate decider, and the stock market has spoken. Yesterday, following revised jobless data, stocks rallied, with the Nasdaq in particular (the growthiest of the major indexes) posting the largest gain. Growth stocks are typically affected negatively when rates rise — however this was also due in part to stellar earnings from Nvidia.
Today, stocks followed suit, rising steadfast once again, with the S&P 500 rallying more than 1% at the time of writing, breaking above the psychological resistance level of 4,200. With this move, the market is saying it cares more about a reduction in the probability of recession than it does about the potential for the Fed to invoke one via rate hikes.