The Fed’s new key inflation rate cooled in November; S&P 500 futures slip
The Fed’s most closely watched core inflation rate eased further in November, albeit slightly less than expected. However, Fed chief Jerome Powell recently focused on a new “more important” inflation rate to justify continued rate increases: PCE services minus housing, which fell to 4.3% last month. The S&P 500 rose modestly, reversing early losses after the personal consumption spending report.
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The PCE (personal consumption expenditures) price index rose 0.1% in the month. The PCE inflation rate continued to decline from the June 40-year high of 7%, falling to 5.5%. Core prices excluding food and energy rose 0.2% on the month as the annual core inflation rate eased to 4.7%.
Wall Street expected a 0.2% increase in the PCE price index and 0.2%, with a headline inflation rate of 5.5% and a core rate of 4.6%.
Powell changes the goalposts with a new key inflation rate
Powell’s new favorite inflation rate turns out to be the most problematic for the S&P 500. The indicator takes into account goods inflation, which is falling rapidly. It also excludes housing inflation, which looks set to fall in 2023 as government data catches up with stagnant market rental growth.
That leaves just basic services other than housing, like health care, education, hospitality, and haircuts. Because price changes for such services are closely tied to wage growth, they provide the best signal of where core inflation is headed, Powell said.
The focus of this statistic is so new that it is not provided in the Commerce Department report nor is it a subject of Wall Street estimates. IBD calculations show that the PCE services price index minus housing and energy rose 0.3% in the month and 4.3% year-over-year, below the upwardly revised annual increase of 4 ,October 7.
The more subdued monthly inflation reading for PCE minus housing and energy services came as prices for transportation services fell 2.1% from October but remained 11.8% above year-ago levels. . Inflation for healthcare services eased to a monthly gain of 0.2%.
The Fed’s new key inflation rate isn’t very good for the S&P 500 because it puts the spotlight on the strongest part of the economy: the ultra-tight job market. Until the labor market cracks, wage growth is likely to remain stubbornly high, and the Fed may raise its benchmark interest rate higher and longer than markets anticipate.
S&P 500, Treasury Yields React to PCE Inflation Rate
Following the PCE inflation report, the S&P 500 added 0.4% on Friday morning stock market action. The Dow Jones Industrial Average rose 0.3%, while the Nasdaq Composite rose 0.2%, after falling at the open.
The S&P 500 and the broader market have been under pressure since the Fed’s half-point rate hike and projections of further tightening to the 5%-5.25% range in 2023. Concerns about the earnings outlook and the explosion of Covid in China add to concerns about excessive adjustment of the diet. However, the bond market does not appear to be buying the Fed’s guidance. As of Friday morning, markets were trading at a top rate of 4.75%-5%.
Through Thursday’s close, the S&P 500 is down 20.3% from its all-time closing high on Jan. 4. While the S&P 500 remains 6.9% above its 52-week closing low, the index has slipped back below its 50-day and 200-day lows. moving averages.
The 10-year Treasury yield rose 6 basis points to 3.75%.
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