Here is the macro. First, some macros for the numerically challenged. The figures refer to July. Compiled and published by the Bureau of Economic Analysis. If you, like me, believe that inflation has long since peaked… this was music to your ears. Personal Income reached +0.2% on an annual basis. Wall Street was looking for 0.6%. Personal Expenses went up +0.1% m/m. The smart ones with erasers and calculators were expecting 0.4% here. Clear signs of slowing economic growth/activity.
As for consumer-level inflation using personal consumption expenditures, or PCE, the Fed’s favorable measure of such price discovery. Month over month, PCE printed at -0.1%, (that’s right, it was down), while core PCE came in at +0.1%. Expectations were for monthly inflation of +0.1% in the headline and +0.3% in the core. Hmm, that’s really a relief. There really is no month-to-month inflation.
Now for the all-important year-over-year numbers. In the headline, PCE came in at +6.3%, up from +6.8% in June and tied for the lowest print since January. In the core, annual print came in at +4.6%, up from +4.8% in June, from the top of the series to +5.3% in February and a new low for this series since October 2021.
That’s right, core inflation is now at its weakest since last Halloween. This is before much of what the Fed has done is felt on US Main Street. Inflation, core inflation in particular, has indeed had a transitory quality. On that note… take it, Jay.
The president of the Fed
I wish I could call Jerome Powell’s speech “short and sweet”… it sure was short. The Fed chair apparently chose to ignore the data. The speech was a warning, a warning that monetary policy is likely to remain aggressively hawkish, even at significant cost to the economy despite the above data released just today showing that current consumer inflation is not exactly out of control.
Powell, and by extension, the committee, apparently want not only to control inflation and reduce annual inflation to their 2% target, but also to completely eliminate any expectation of anything but stable prices. In fact, Powell opens with comments about how fundamental price stability is as “the bedrock of our economy.”
Powell bluntly states that measures taken to slow the pace of investment and spending “will reduce inflation, they will also bring pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean much greater pain.”
Just a thought… in my experience recessions are very painful.
In fact, Powell reaches back to the 1970s for precedent. He talked about mistakes made at the central bank that allowed for a period of both turmoil and hyperinflation that ultimately led President Carter to install now-legendary Fed chairman Paul Volcker as head of the Federal Reserve in 1979.
Volcker, as we all know by now, raised interest rates, slowing the economy and eventually brought inflation under his control. The whole sequence of events caused more widespread pain, in Powell’s view, than if Volcker’s predecessors had taken the necessary steps in a more timely (aggressive) manner.
Powell leaves you with this… “The longer the current period of inflation continues, the greater the likelihood that expectations of higher inflation will be entrenched.”
Where do we go from here?
Stock markets that have been slow to trust the Fed’s aggressiveness sold off a bit more after the speech. All eleven S&P sector-selected SPDR ETFs have gone into the red, with “growth” sectors moving toward the bottom of the performance charts. The US 10-year/2-year yield gap narrowed to -32 bp. on Thursday, it is now trading around -38 bp. A negative spread signals economic contraction. A deeper reversal probably signals a deeper recession.
The speech was an attempt by the Fed chairman to tell the investing public that (they) are willing and even intending to hurt the US economy in order to further contain both inflation and inflation expectations. For you and me, it depends on whether we believe the committee will blink when there is no doubt about an economic contraction and when the labor market is clearly at the center of the contraction.
As an investor?
This speech which amounted to a commitment that I don’t believe should have been made tells me to reduce across the board long-term exposure and especially lighten technology or growth investments. Powell is literally telling me to be more of a trader and less of an investor, at least for now.
He even indicated that a new jumbo rate hike may be necessary in the near future. You and I both know this will be a mistake in policy. Unfortunately, we have no say in politics. A sentient voice in the wilderness must be heard immediately.
As a marketer?
That rejection for the S&P 500 on August 16th at the 200-day SMA will likely, if the Fed sticks to what this speech describes, look like the body of trees standing out at Gettysburg about a mile away from where they came out Pickett’s troops.
I change my mind all the time. Marketers do this. Investors must stand up and fight. I don’t think you fight this Fed like that. The guerilla tactic is how to do it from here until the committee realizes it has / is wrong / is wrong. Light at night. Light on weekends. Staying cash. Now, good luck, and God bless.
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