CNBC Overtime’s Post

What happens when your preferred metric is not cooperating causing angst and consternation? Do you look for an alternative metric? Do you deny that this was ever your go-to metric, Do you accept the results and press ahead, or do you quietly shy away from questions? Headline...the Fed Reserve's preferred Personal Consumption Expenditure Price Index (PCEPI US inflation measure) rose faster in March supporting inflation. The increase of 0.3% is a month-over-month increase and over 2.8% from a year ago. Adding, yet another nail in the ⚰ for an interest rate decrease.

Inflation Eases in April, Raising Hopes for Fed Policy Shift The latest US inflation data provided a glimmer of hope that price pressures may be starting to cool, fueling expectations that the Federal Reserve could begin easing its aggressive monetary tightening campaign later this year. The Consumer Price Index (CPI) report released today showed that headline inflation rose 0.3% in April, slightly below the 0.4% increase forecast by economists. On an annual basis, the pace of consumer price growth decelerated to 3.4% from 3.5% in March.

Today, markets will be eyeing the updated PCE inflation numbers set to be released. As the Fed's preferred measure for tracking inflation, the Personal Consumption Expenditures (PCE) index can provide crucial insights into price changes for goods and services. The Bureau of Economic Analysis defines PCE as, a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. Currently, PCE inflation is at 2.8%, well above the Fed's target of 2%. The upcoming data may be pivotal in guiding both the Fed's policy decisions and market expectations. #PCEInflation #MarketUpdate #FederalReserve Disclosures: https://lnkd.in/e8uuxDSe

Very impressive results on the Fed's inflation fight. As illustrated in Wayne Wennick's chart's below the Fed's mid year projections for PCE at end of year was 3.9%, November's realized was 3.2%. If we see a similar downside miss on December's data, which is in the cards, as we saw for November we could be well below the Fed's prior predictions. While markets have a tendency to get ahead of themselves and we did see an ebb in the positive sentiment around rates/USTs in the last week or so. This fact is supportive of an overall dovish trajectory out of the fed for 2024 which will be accommodative both for financial conditions and asset prices.

Chart from Charlie Bilello showing that monetary policy is restrictive with the lower bound of the Fed Funds Rate at 5.25% with year-over-year Core PCE at 2.57%. Inflation moving lower and the labor market starting to weaken back to pre-pandemic level setup potential rate cuts at a future Fed meeting. #monetarypolicy #labormarket #fedfunds

JOHN, IT'S LOOKING TIGHT: The argument for a rate cut grows stronger with today’s PCE numbers. The Taylor Rule, named after John Taylor, has been modified by many market pundits, including myself, so defining it is important. I used a textbook version with static values for the Neutral Real Rate and the Okun Factor: Neutral Real Rate + Core PCE + Alpha * (Core PCE - Target) + Beta * Okun Factor * (NAIRU - Unemployment). The Taylor Rule's ability to forecast the optimal Fed Funds rate is complex, as it often presents a "chicken and egg" problem, or what some might call simultaneity. Given the current context, it’s clear that inflation is weakening. If the Fed waits too long to cut rates, they may contribute to sustained economic weakness: #factset #cfainstitute #chartoftheday

Despite the selloff in Rates last week and the market pricing in less chances of a March Fed rate cut (slide 5), inflation data continues to improve steadily. We would not be surprised to see core PCE data for December 2023 to come in at 2.9% y/y when the number is released this Friday. Bear in mind on June 14, 2023, the Fed SEP (Summary of Economic Projections) had anticipated this number to be 3.9% for YE 2023 so we might be 1% lower than they suggested just 6 months ago! A couple of slides on Energy are included and highlight the lack of pricing pressure from that sector. #inflation #federalreserve Equity divergence is a theme we have touched on in prior weekly pieces and there are further charts included. #equities Good luck this week!

The gap between the core consumer price index and the core personal consumption expenditures price index has rarely been this wide. The median gap in the 60 years pre-pandemic was two-fifths of a percentage point, but core CPI rose significantly more on a year-over-year basis in January compared with core PCE. Meanwhile, Federal Reserve officials continue to weigh in on the inflation situation, with New York Fed President John Williams reiterating that rate cuts are likely coming later this year.

A possible surprise for 2024 Core PCE inflation is very likely to be very low in November. This means that before the January meeting core PCE 3 months annualised should look very close to Fed’s target. This opens the door for possible rate cuts by the Fed by Q1 and possibly already in January. This is not a surprise after Christopher J. Waller’s speech, who clearly hinted to surgical cuts to the policy rate in response to falling inflation in order to prevent unnecessary tightening due to raising real rates. We respect and understand Waller’s application of a simplicist Taylor’s rule, in particular given the recent drop in inflation, but we do not agree it is the right way to measure how much policy is restrictive: financial conditions, i.e. asset prices, signal that policy is unlikely to be sufficiently restrictive (we could argue that with the recent drops in rates the Fed has already cut). This means that after the disinflation that is already in the pipeline in the short term, we think a major surprise could be that inflation will remain above target for longer and growth will remain above potential, forcing the Fed to reverse its course of actions at some point in 2024. We do not exclude in this case that the Fed will have to tighten policy even more than it has so far. In this case, the markets will have to reverse abruptly the aggressive cuts priced in. Full analysis on the link below: https://lnkd.in/exvQGXkV

This week's economic calendar will revolve around inflation and the Fed's December policy-setting meeting. Consumer price inflation is expected to have remained relatively cool in Nov, with headline CPI unchanged and core up 0.3% m/m. Meanwhile, producer prices are expected to roughly mirror consumer prices in Nov, with headline unchanged and core up 0.2% m/m. The Fed's policy decision will be announced at 2pm ET on Wednesday, which will likely reflect rates still on hold and few changes to the official statement. Thus, focus will be on the post-statement press conference and the latest summary of economic projections (SEP) or dot plots. The SEP is likely to reflect an extrapolation of the recent progress on inflation into 2024 and thus a modestly faster normalization path for the fed funds rate as well. Overall, the Fed is likely to maintain a hawkish stance, with Powell likely to push back on any discussion of rate cuts during the Q&A. #ArchEmployee #Fed #inflation #economics